The newly released proxy for the proposed merger of the Liberty SiriusXM tracking stock with
Holdings highlights the high valuation of the satellite radio company relative to the cable industry—a risk for investors who have bought the tracker in hopes of gains when the merger closes.
Liberty Sirius XM tracking stock trades at about a 30% discount to the value of the Sirius XM stock that tracker holders are due to receive early in the third quarter, so the tracking stock has proven irresistible to many big-time investors.
leads the list, with a 21% stake worth about $2 billion, but some notable hedge funds, including Steve Cohen’s Point72 and Seth Klarman’s Baupost Group, have piled in as well, according to data as of Sept. 30.
The current issue is that financial projections in the proxy, posted on the
website Tuesday, show that Sirius XM Holdings is expected to post lower revenue and earnings before interest, taxes, depreciation and amortization in 2024. Ebitda is a closely watched financial metric for the company.
The forecasts, compiled by the satellite radio’s company’s management, appear to be depressing Sirius XM Holdings shares, which were off 3.4% to $5.10 Tuesday. The two liquid Liberty SiriusXM tracking stocks—the voting and nonvoting shares—also were lower. The voting stock (LSXMA) was off 0.6% to $30.26, while the nonvoting stock (LSXMK) was down 1% to $30.09.
Sirius XM is valued at about 10 times projected 2024 Ebitda based on its enterprise value of about $27 billion, or debt plus equity market value, Barron’s estimates. The cable-industry leaders
and
which have arguably better franchises than Sirius XM, trade for about seven times projected 2024 Ebitda.
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In a client note before the market opened Tuesday, Citigroup analyst Jason Bazinet wrote that the management projections in the proxy are a “slight negative” and that he expected “a bit of pressure on SIRI (and perhaps LSXMA) today.” SIRI is the ticker for Sirius XM Holdings.
In the proxy, Sirius XM management projected $8.75 billion of revenue for 2024, and $9 billion for 2025, against about $9 billion for 2023.
It forecasts $2.7 billion of 2024 Ebitda and $2.9 billion in 2025 versus $2.9 billion in 2023. The company sees $1.2 billion of free cash flow this year, little changed from 2023, rising to $1.5 billion in 2025.
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According to Bazinet, the revenue projections for 2024 and 2025 were about 4% below consensus estimates, while the 2024 calls on Ebitda and free cash flow were below the consensus by 2% and 6% respectively. The 2025 Ebitda and free cash flow forecasts were 1% above the consensus, he said.
Negative news about Sirius XM, or views that it is overvalued relative to its peers, could weigh on the price at which it trades when the deal closes. That would be a problem for holders of the tracking stock, who will receive 8.4 shares of Sirius XM for each tracking share at that point.
An avalanche of Sirius XM stock is expected to hit the market. Liberty Media holds about 83% of Sirius XM and has attributed that stake to the Liberty Sirius XM tracking stock. It will be converted into newly issued Sirius XM stock assuming the deal gets done, greatly increasing the publicly traded float. Current Sirius XM holders will get newly issued stock on a one-for-one basis.
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Complicating matters is that many investors in the tracker have shorted Sirius XM stock to benefit from the share-price differential between the two securities. Those short sales, which depend on borrowing stock, have made shares of Sirius XM, which has a thin public float, even more scarce, boosting its price.
Bazinet has a Sell rating and $4.10 target on Sirius XM stock. At that price, the company would be valued at under nine times projected 2024 Ebitda, Barron’s estimates. The current tracker price of $30.26, divided by the 8.4 shares of Sirius XM holders will get assuming the deal goes through, implies a price of about $3.60 for Sirius XM. That price would value Sirius XM at about eight times estimated 2024 Ebitda, a touch higher than for the big cable companies.
The current value of 8.4 shares of Sirius XM is about $43. Investors in the tracker trade are betting that Sirius XM can hold a lofty valuation relative to cable companies despite what amounts to a no-growth revenue outlook and only modestly higher 2025 Ebitda relative to 2023.
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The company’s automobile-oriented satellite radio subscriber base was flat in the third quarter, and its listeners skew older. Berkshire CEO Warren Buffett, 93, is a big fan of the Siriusly Sinatra station. One challenge the company faces is that younger auto buyers may not want to pay $18.99 a month for one of the more popular service plans when they can play music from their phones in their cars for free.
Several Berkshire watchers say the holding in the tracker is believed to be held by Ted Weschler, one of two managers who work with Buffett on the $350 billion equity portfolio, rather than Buffett himself.
Sirius XM is now valued at about $17 billion, based on the postdeal share count. It will have net debt after the deal of about $10 billion, according to the proxy.
Write to Andrew Bary at andrew.bary@barrons.com
