Liberty SiriusXM (LSXMK) – Discount Mean Reversion – 10% Upside

Current Discount: 38%

Average Discount: 28%

Upside: 10%

Expiration Date: TBD

 

Liberty SiriusXM is a tracking stock for Liberty Media’s 72% stake in Sirius XM Holdings (satellite and online radio broadcaster – SIRI). As most tracking stocks it trades at a significant discount to NAV, which since 2018 used to be around ~30%, but has reached 40%+ over the last couple of weeks. Aside from the market panic there does not seem to be any apparent reason for this move. Thus the bet is on a swift return to the mean, offering 10% upside. SIRI borrow for hedging is available an cheap (0.57% annually at IB).

I think it is a matter of when and not if the discount will return <30%. And the main risk here is dedicating capital to this transaction instead of other potentially more lucrative market-recovery type situations. However, these opportunity costs can be avoided by buying LSXM outright (skipping the hedge) and betting simultaneously on the discount return to the mean as well as the recovery in SIRI stock price (down 29% since Feb, so rather in line with the broad market).

For more background on LSXM and SIRI please refer to the previous write-up on SSI and as well as this VIC article.

In the past (see graph below) there were other similar opportunities of LSXMA discount widening, however at the time SIRI borrow was tight/expensive and the discount differential was not as wide.

Liberty’s management (John Malone and Greg Maffei) has a very strong reputation of value creation for shareholders and their interests are well aligned (from VIC):

John Malone: $46mm of Series A, $349mm of Series B (second largest personal public holding), $606mm of Series C (largest personal public holding). Collectively, Malone owns ~8% of LSXM. Greg Maffei: $71mm of Series A (third largest personal public holding), $119mm of Series C (second largest personal public holding).

Moreover, management has been hinting on completely eliminating the LSXM discount for a few years already.

 

Discount to NAV

Current discount calculation:

SIRI discount now

Historical discount to NAV during the last two years:

SIRI DIscount

Note: SIRI stake makes up 97% of LSXM NAV. Minor fluctuation in values of other assets/liabilities have little impact on the overall calculations – so for the sake of simplicity I have used figures from Dec’19 financials for ‘other assets’ and ‘debt’ during the whole time period (i.e. these are not adjusted for every quarter).

 

14 Comments

14 thoughts on “Liberty SiriusXM (LSXMK) – Discount Mean Reversion – 10% Upside”

  1. Case of insider information acting before the public ? I’ve seen it before

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    • I own it and like it here. Took waaaaay too long but a fine outcome.

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    • how could the deal fall apart, that is the main risk. and the long LSX is hard to hedge given the lack of siri borrow.

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    • My key issue with this one is expensive borrow. Putting on a hedged trade is difficult and might not pay-off. There is also a non-zero risk of a short squeeze, especially with float materially smaller than Liberty’s stake in SIRI. Options (e.g. September expiration) pricing indicates the same – the price of put options fully eliminates any spread.

      Long-only LSXMK position might work out, but keep in mind that SIRI is a highly leveraged entity. What would be a 30% drop in market cap (for the long-only LSXMK to break even) is only a 15% decline in EV. I do not think anyone can say with any confidence that the market’s perception of SIRI value will not change by that much or more over the upcoming 7-8 months.

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      • Might not be applicable for the US based investors but I’m Cayman based and IB offers CFD’s on LSXMA making that far more attractive than the short borrow rates(which are currently ~40%).

  2. Is there a way to lock in a long position and limit the downside? eg a collar?

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  3. Given the price of puts, I ended up taking a long position on LSXMK with LEAPs — I could lose 100% but it sort of limits downside by requiring a smaller cash outlay than buying the shares.

    Any downsides to having calls instead of shares?

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  4. interesting that berkshire have bought a lot of LSX shares in the past weeks

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