Sirius XM Holdings Inc SIRI

Seeking alpha article re: siri prospects!

[Humanist]

Liberty SiriusXM: The NAV Discount Might Persist For Longer
Nov. 17, 2020 11:26 AM ET
Summary

Liberty Media and Live Nation released their Q3/2020 results without any surprises.

The NAV discount remains stubbornly high.
While Sirius XM continues to repurchase its shares and Liberty Media could step up buybacks as well, other developments might push out the collapse of the NAV discount.
Two weeks ago, Liberty SiriusXM (NASDAQ:LSXMK) (NASDAQ:LSXMA) (NASDAQ:LSXMB) released its Q3/20 results (10Q - transcript), and the same evening we also got results (transcript) from Live Nation (LYV), 30% of which is held by Liberty SiriusXM.

Those following the company closely didn't find anything really surprising, since most of the news was already public with Sirius XM's (NASDAQ:SIRI) Q3 release, which I have already reviewed here.
First of all, the NAV discount: It remains stubbornly high at ~34%. Following the reattribution of the Live Nation stake to Liberty SiriusXM, its calculation has become more complicated, as several tiny stakes in iHeartMedia (IHRT), Formula One (FWONA) (FWONK) (OTCQB:FWONB) and the Braves (BATRA) (BATRK) (OTCQB:BATRB) need to be considered alongside warrants and a call spread related to Live Nation's stock performance following the reattribution. Liberty SiriusXM's debt has also increased. Overall, however, the story has not changed at all: The stock trades at a discount of about 34% to its NAV, which effectively means that, by purchasing Liberty SiriusXM, you get a stake in Live Nation for free, since it represents less than 19% of NAV, i.e. much less than the total discount.

(all figures in '000s except stock prices)
SIRI stock price ($)	6.27
SIRI s/o in '000s	4,249,501
SIRI Mcap ($)	26,644,371
LSXM owns (shares)	3,162,174
LSXM ownership of SIRI	74.41 %
= LSXM owns ($)	19,826,831
LYV stock price ($)	66.08
LYV diluted s/o in '000s	233,000
LYV Mcap ($)	15,396,640
LSXM owns (shares)	69,600
LSXM ownership of LYV	29.87%
= LSXM owns ($)	4,599,168
IHRT stock price ($)	10.13
IHRT diluted s/o in '000s	71,000
IHRT Mcap ($)	719,230
LSXM owns (shares)	3,200
LSXM ownership of IHRT	4.51%
IHRT warrants value ($ estimate)	38,494
= LSXM owns ($)	70,910
FWONK stock price ($)	41.61
FWONK diluted s/o in '000s	233,000
FWON Mcap ($)	9,695,130
LSXM owns (shares)	5,300
LSXM ownership of FWON	2.27%
= LSXM owns ($)	220,533
BATRK stock price ($)	24.50
BATRK+BATRA+BATRB diluted s/o in '000s	61,000
BATR Mcap ($)	1,494,500
LSXM owns (shares)	2,300
LSXM ownership of BATR	3.77%
= LSXM owns ($)	56,350
LSXM debt ($)	-3,139,000
LYV call spread ($36.72-$47.74) estimate	-219,000
LSXM cash ($)	104,000
= LSXM NAV ($)	21,519,792
LSXMK stock price ($)	41.51
LSXMK+LSXMA+LSXMB diluted s/o in '000s	344,000
LSXM MCap incl options ($)	14,279,440
LSXM discount to NAV	-33.65 %
LYV % of NAV (assuming uniform distribution of debt)	18.56%

On the other hand, Sirius XM itself continues to repurchase its own shares, bringing its majority owner closer to the 80% ownership threshold. Currently, Liberty Media owns 74.4% of the company. After another year of buybacks, this should become 80%, at which point Liberty Media can increase the dividend payout at Sirius XM, so that it can effectively use Sirius XM's cash flows to buy back its own, much cheaper stock. At this point, so goes the theory, the discount should inevitably collapse.

In the meantime, Liberty SiriusXM is in the enviable position to repurchase already some of its own stock, thanks to the small dividend received from Sirius XM and thanks to a few interesting debt issuances, one of which was closed just a few days ago:

"Liberty Media has closed its offering of $800M in 0.5% exchangeable senior debentures due 2050.

About 8.879M shares of Live Nation common stock are attributable to the debentures. With 11.0983 shares of Live Nation attributed to each $1,000 in principal, initial exchange price is $90.10 for each Live Nation share."

In Q3, share repurchases were just $110m. These are highly accretive due to the NAV discount. As Liberty Media notes, the company effectively bought Sirius XM stock at a look-through price of $3.66 per share - today, it trades around $6.30.

The newly issued convertible debt - which is not the first issuance of this kind at Liberty Media - however, further increases the look-through discount. Given the ridiculously low and effectively negligible interest rate of just 0.5%, we might argue that Liberty Media just "sold" about 9 million shares of the ~70 million it owns for a price of $90.10 each - a 36% premium to Friday's market price. If it used the proceeds to repurchase its own stock, which includes again Live Nation and Sirius XM at a 34% discount, it could effectively (partially) repurchase the same Live Nation shares it just sold for $90.10 for the bargain price of $44. In addition, it would purchase also more of Sirius XM at an effective discount of the same proportions, i.e. ~50%. These convert issuances are, therefore, akin to printing money.

Moreover, while previous debt issuances were relatively small, this time, Liberty Media will have $800m at its disposal, representing 5.6% of its market cap. A buyback of this size could really move the needle for Liberty SiriusXM shareholders.

Regardless of all these wonderful effects of smart, patient financial engineering, the stock remains available for everybody at a large discount. There are several, quite complicated (some outright brain damaging) theories about the discount and whether it is correct or incorrect.

One of the simpler ones states that Sirius XM is overvalued, but given its tiny liquidity and the enormous buybacks, short sellers prefer to use the more liquid Liberty SiriusXM as a proxy to short, which drives its share price down. Hence, so goes this theory, Liberty SiriusXM is correctly valued, while Sirius XM itself is too expensive. The NAV discount is a discount compared to an illusionary value.

Other theories hinge on the prediction that the 80% ownership threshold will never be reached, since there will be complex M&A maneuvers before that point in time. For example, some believe that the recent convert issuance was done not to fund repurchases but to fund an equity purchase from Live Nation. Since Live Nation is highly indebted and is obviously struggling during the pandemic, it might need to issue equity, and Liberty Media would want to keep its stake constant or even increase it. And Sirius XM itself would also purchase a stake, thus consuming its cash, which would delay further repurchases and, hence, even the 80% ownership threshold for Liberty Media.

Another theory speculates on similar maneuvers involving iHeartMedia.
All Liberty SiriusXM shareholders remember when Sirius XM purchased Pandora, and the stock tanked by more than the market value of Pandora, as investors hated the pollution of the so simple, so beautiful growth story at Sirius XM, while delaying further share repurchases. It can happen again.

Personally, I don't think such musings provide reasons to not own the stock. I love the NAV discount and have no hurry for it to close. If further M&A delays the closing and causes a sell-off, even better. In the meantime, repurchases at even larger discounts to NAV would increase my share of the cake.

In my opinion, investors think far too much about these matters. The story is simple: You own an investment vehicle that owns stakes in various great companies. The capital allocators have a proven track record and are risk-averse, extremely patient, and smart. They also have skin in the game, owning personally large stakes in Liberty Media.
Fortunately, the market does not care. So be it. I will be forever grateful.

Disclosure: I am/we are long LSXMK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.