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).