Liberty SiriusXM (LSXMK) – Discount Mean Reversion – 10%+ upside

Current Price – $40.9

Target Price – $47 (assuming discount to SIRI reverts to historical 20%)

Upside – 10%+

Expiration Date – TBD

This idea was shared by Greg.

 

LSXMK is Liberty Media’s, (John Malone, Greg Maffei)  tracking stock for Liberty’s 70% ownership in Sirius XM radio (ticker SIRI). This is certainly not an “under the radar” trade as none other than Warren Buffet swapped out a good portion of his direct SIRI holdings and instead took a sizable position in LSXMK in August of last year. Like most tracking stocks LSXMK has traditionally traded at a mid 20′s discount in relation to the assets it holds.

However, two recent events have created a situation where the trade is significantly more attractive than when Buffet executed his swap.

First, DVMT is Dell’s tracking stock for it holdings in VMWARE – a similar structure to the LSXMK and SIRI.  When Michael Dell began floating ideas about going public, the market fretted about what would happen to the tracking stock and DVMT declined significantly in real terms and in relation to its holdings in VMWARE. Shortly thereafter, LSXMK also dropped an additional 10% in relation to it’s holdings in SIRI, potentially being painted with the Dell’s Vmware “tracking stock”  broad brush (listen to 10:10 of the Deutsche webcast to hear DVMT situation being discussed).

Secondly, as a result of this further LSXMK decline, Liberty issued a $400 million debenture with the one of the top plans for use of proceeds being additional buybacks of LSXMK.

The Company expects to use the net proceeds of the offering to repurchase shares of Liberty SiriusXM common stock, to make possible acquisitions and investments, and for other general corporate purposes, including to pay interest on the debentures.”

The situation offers two opportunities for gain. First, that the discount moves back to to the more traditional mid 20′s discount range as the additional buyback takes effect and the market comes to the realization that John Malone is not Michael Dell.  The second opportunity for gain is when the discount actually goes to zero (this will likely take a few years).

I have been following and investing alongside John Malone for 30 plus years and could not be more confident that ultimately he and Maffei will arrange the right structure to get LSXMK holders full value for their SIRI holdings. The biggest issues and a primary reason trackers trade at a discount is the tax implications, so this will take time in order to be tax free, possibly several years. Liberty now has huge ownership in Pandora and looks like they may gain control of Iheartradio. as well. There is some speculation that some combination of Siri. Pandora, and Iheart under the Liberty umbrella might open up an opportunity to unlock the full LSXMK value.

For anyone considering LSXMK I highly recommend you listen to Greg Maffei at the Deutsche Bank Media conference March 5.

 

Risks

Unhedged positions are exposed to changes in SIRI stock price. Even if discount narrows as expected the trade might result in losses if SIRI stock drops.

For hedged trades, Siri is a highly shorted stock and borrow fees at the moment are 5.5% to 6%, so if this takes 2 or three years to eliminate the discount a good portion of your gain is paid in fees. If discount is expected to revert to historical average within a few months, then a hedged trade betting on this reversion might make sense.

One hedging strategy is to sell in the money SIRI Leaps, possibly the 5 or 5.5′s if the market offers enough liquidity to do so. It does not offer the full protection of a SIRI decline as an outright short would but selling the 5 LEAP would offer 20 percent downside risk protection and you would avoid the borrow fees. Of course your trade would be treated as naked.

 

Conclusion

There are lots of LSXMK/SIRI arbitrage writeups (e.g. one from VIC) that provide a lot of good detail.  The incremental 10% discount and the $400 million  buyback are “new news” (although already more than a month old) and I believe offer an excellent entry point. Liberty owns a wide variety of assets including Formula One, the Atlanta Braves, QVC, HSN and has countless securities representing these interests. As you will hear if you listen to the call,  Maffei says the most misunderstood and undervalued is LSXMK (1:45 in Deutsche presentation).

6 COMMENTS

  1. greg lia

    A quick update on the LSXMk trade. Tuesday of this week there was a major narrowing of the discount, gave it all back on Wednesday, and then another major narrowing on Thursday. Not unusual for the discount to widen on ugly market days like today with investors seeking a risk off mentality, however that was not the case and there was incremental narrowing yet again today. It is unusual to see such large daily divergences between lsxmk and Siri, one can only hope liberty is starting to deploy some of that $400 million debenture

    For those interested in possible hedging strategies here is a trade I put on a few weeks back and closed today in conjunction with option expiration

    With LSXMK at $40.40 and Siri at $6.25 bought 1000 LSXMK and sold 65 April 20 Siri 6 calls for .30.
    Sold LSX MK today at $41.46 and bought 6500 shares of Siri at $6.32 to satisfy short option position. Gain on LSXMK $1040 loss on Siri position $130 net gain $930. A good portion of the gain was attributable to the time decay on the Siri option.

    Hoping to reestablish the position again after Siri earnings on April 25

  2. greg lia

    Earnings out today, con call attached…..two very direct questions about the current discount last 5 minutes of call. Best quote of the call “we bought back $100 million of lsxmk at an effective SIRI price of $4.66″ (Siri currently $6.70) We think that is a pretty good investment.” Good info on the Atlanta Braves, Formula One, Nascar, and Trip Advisor, (up 20 percent today) for anyone who might be interested

    https://edge.media-server.com/m6/p/uzik97xz

  3. greg lia

    Berkshire 13f just released tonite. More than doubled lsxma stake in q1 from 14 to 31 million shares. Incremental $700 million investment, now approaching 10 percent ownership.

  4. Alex15

    @greg the stock is now trading higher is the case still valid? Or is the risk/reward trade-off now less attractive?

  5. greg lia

    Yes it’s been a very nice move up in the stock. My position at the moment is mostly unhedged so I am fortunate from that perspective. Having said that, the discount has not narrowed and still remains in the 30% range, so the thesis is very much still intact. Of course SIRI has had quite a run so you are susceptible to any pullbacks it might make.
    I believe buffets holdings are a huge positive. He is an investor in other liberty properties and a possible suitor for some that are maturing. I see Malone taken great care to make sure this comes to a fruitful conclusion.

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