Stock Tracking and Merge with SIRI

Liberty SiriusXM Group (LSXMA/K) is the Malone-style tracking stock for Liberty Media’s majority ownership interest in SiriusXM (SIRI). Liberty famously bailed out SIRI following the financial crisis and made a killing on the investment (much of it early in their holding period). Nearly fifteen years later — skipping over a lot of interesting history — in December, Liberty Media reached an agreement to formally split-off their stake and merge it back with SIRI, creating a simplified one-class share structure at the satellite radio provider.

As almost all tracking stocks do, LSXM has traded at a significant discount to underlying shares it is meant to track, this transaction is meant to collapse that discount, however, even a month after the transaction was announced (and with a relatively quick, “early Q3” close) a large discount remains. The exchange ratio set forth in the merger agreement is estimated to be 8.4 (might move around ever so slightly) shares of SIRI will be issued to each share of LSXM. Using the current share prices, the spread is approximately 44.1%.

Said another way, one could effectively buy SIRI for $3.62/share via LSXM today. Why might this discrepancy exist? The primary argument I’ve seen is SIRI shares are overvalued as SiriusXM has pursued a typical Malone-style levered equity model and repurchased a significant amount of SIRI stock, which has artificially increased the price of SIRI and reduced liquidity (and increased the percentage owned by Liberty Media). That might play a small part in it (but SIRI isn’t currently in the market and presumably arbs are shorting SIRI against LSXM), but I believe the larger reason for the spread is still the hated tracking stock structure, many investors don’t understand it or simply can’t own it (won’t find LSXM in many index funds).

Looking at LSXM from a fundamental perspective, you can create SIRI for a fairly cheap valuation that should provide some downside protection post merger completion if indeed SIRI is the overvalued side of the trade.

As always, please feel free to point out where I might be incorrect. I’m using 2024 estimates from Tikr as management hasn’t provided guidance yet. It should be noted that SiriusXM is in the middle of large multi-year capex spend on revamping their satellites and free cash flow should jump considerably starting in 2025. Post-close, SIRI should become eligible for more index inclusion, including the S&P 500 where it is currently excluded as a controlled company. Similar to JXN or others, that could provide support for the shares and add a turn or two to the multiple.

There is some business risk here, SiriusXM will have considerable debt at 3.9x EBITDA and a relatively flat growth profile. SiriusXM does plan to prioritize deleveraging following the close of the transaction to get back to their 3-3.5x target leverage ratio, before fully turning back on the buyback machine. While their churn is remarkably low (surprisingly, even during Covid, subscribers didn’t cancel despite commutes dropping), their subscriber base is aging and they continue to face competition from Apple, Spotify and others. They are reinvesting in the business to push back on competition, launching a new tech stack, including a streaming only version, but I view these efforts as mostly defensive. Either way, this is a surprisingly resilient business and should be fairly stable in the near to medium term.

Disclosure: I own shares of LSXMK