Investment Strategies / Falling Knives
No. of Recommendations: 7
Have any of you looked into Berkshire’s activities with Liberty SiriusXM Group?
A quick summary of what it looks like to me.
Berkshire has been buying for a reason.
The securities, tickers and entity names involved are quite confusing initially but it all makes sense. In short, if following Berkshire the trade is buy LSXMK. (Could also short SIRI). There is a YouTube video explaining it all.
Effectively LSXMX is merging with SIRI. There is a 20% discount on LSXMK. When the deal closes in the next few months, the discount will close to zero. Either with LSXMK rising or SIRI falling. One thing I’m unsure about, is the debt situation in the transaction. It may reduce the supposed 20% arbitrage opportunity. Anyone care to comment on that??
Risks include:
1. Deal does not happen. This seems very unlikely given John Malone wants it to happen and he is in control. I can’t see any regulatory reason to stop, what is just a reorganisation.
2. A general stock market fall that causes the target SIRI to fall.
3. A negative trading update from the target underlying business.
4. This 20% arbitrage opportunity is less than this due to debt merger agreement.
If the deal does not go ahead, or you decide to hold long term, the economics of the underlying business and its capital structure are very relevant. But less so, if you are speculating on the transaction. The business (subscription based US satellite radio service and music streaming) has been performing okay in recent years and seems to be valued in the market at about 10x earnings. I don’t know much about it but it doesn’t look terribly exciting and perhaps hard to know how it looks 20 years from now. Interestingly, Berkshire does own a small amount in the target, which suggests perhaps it likes the economics: price equation long term. That provides some reassurance for the risks of participating in the arbitrage. You just need the subscribers not to unplug in the next 3 months which is unlikely.
Anyway, wondering if anyone more informed, would comment if the above 20% return opportunity (over say 3 months) from copying Berkshire, is how this looks to you?
No. of Recommendations: 2
I have a small position in LSXMK. I don’t think Ted/Buffett bought for the arbitrage opportunity. You can’t short the Sirus stock (small float and no more borrow).
But after the deal close, the stock has a cleaner structure and may be added to index, and a lot of institutional money will start buying. Right now many institutions don’t want to buy a tracking stock.
Also, it seems at least to me Sirus’s subscriptions is highly correlated with new car sales. People are working from home. They drive less but are getting newer cars (I think). Maybe Ted/Buffett has some insights in the cars sales.
No. of Recommendations: 5
The current discount of Liberty Sirius to SIRI is not 20%. It appears to be approximately 5.75%.
No. of Recommendations: 2
It's all great focusing on the arbitrage of tracking stock. But how good is the business itself?
Barron's take on the investment:
So far this year, SiriusXM is the biggest loser in the Nasdaq 100 index with a decline of 34%.
What happened? Sirius XM, which traded around $5 a share at the time of the December deal announcement, looked richly valued at that time, trading for about 10 times estimated 2024 earnings before interest taxes, depreciation and amortization (Ebitda).
That’s a premium to cable and broadband leaders Comcast and Charter Communications that trade for under seven times 2024 Ebitda (based on their enterprise values). Sirius XM has become a no-growth company with flat revenue and a slight decline in satellite radio subscribers last year—the total is about 34 million.
Car buyers—particularly younger ones—seem increasingly reluctant to pay $18.99 a month for a Sirius music and entertainment subscription when they can listen to music from their phones. Sirius XM’s satellite radio subscriber base skews older with Berkshire CEO Warren Buffett, 93, a fan of the service and its Siriusly Sinatra station that plays standards.
https://www.barrons.com/articles/berkshire-liberty...
No. of Recommendations: 2
It's really not an arbitrage for Ted Weschler. He isn't short SIRI (he is actually long a few shares).
There are no natural buyers for SIRI stock (unless you are specifically covering a SIRI short position) because the Liberty Sirius shares are available at a discount and will collapse into the same security very soon.
As mentioned here previously, you cannot short SIRI inexpensively and there have already been one or two sudden short squeezes.
No. of Recommendations: 7
Car buyers—particularly younger ones—seem increasingly reluctant to pay $18.99 a month for a Sirius music and entertainment subscription when they can listen to music from their phones.
A subscription to Apple Music is $10 a month, and most new cars are going to support CarPlay, so why XM?
That said, I have a new car which came with a 3 month trial subscription. After being dunned and harangued for weeks, I finally gave in and subscribed … for $4 a month for a year. I’m not sure it’s even worth that, but at that price I’ll give it a shot.
It’s still linear media, which means I’m at the mercy of the DJ (computer) whim. If I subscribe to a music service I can decide what I want to listen to, when, and for how long. I don’t see a big future for XM except for expensive, special programming (Stern, etc.) but there aren’t enough of those to make it a business, I don’t think.
No. of Recommendations: 0
No. of Recommendations: 5
So the YouTube analysis I have watched talking about a 20% arbitrage opportunity is incorrect probably because it failed to account for the debt in LSXMK. A 20% discount, for a transaction with a short time frame and high probability of going through made no sense.
So Berkshire likes the business longer term.
A couple of things not mentioned so far about the underlying business.
Management say that capex drops dramatically in a year or two. Boosting FCF.
Management say customers like a host lead service. That makes a lot of sense to me. There is a place for both on demand content but also host lead.
Berkshire obviously has a window into car sales and industry trends through BH Automotive.
Apple Play relies on phone connectivity seems to be a clear technical disadvantage.
Management say they have new app delivery technology going live soon that enhance user experience e.g. when you leave the car you will be able to continue listening on phone or in home.
They can merge the streaming service into the radio service. This sounds like a benefit for customers but a risk to subscription income.
Maybe a little speculative but maybe Berkshire thinks Apple could acquire the business to access the satellite technology and deliver Apple Play over that.
It looks like a business that has been disrupted, like many others in last 20 years but maybe there is still something there of value. It’s generating significant cashflows and with big capex complete. The idea of competing with Apple and the customer demographics probably means it needs to be cheap. 10x feels okay but nothing too exciting.
Anyway, Berkshire (Tedd) likes it. Hopefully it works out well for him. Berkshire needs future capital allocators that are getting the odd thing right now and again.
I’d love to know if Berkshire sees just a safe c.10% or if there is some special competitive advantage that could lead to higher returns. It does have a monopoly on the radio satellite business. Is that valuable, or is it like owning the last newspaper in town but eventually all your readers die.
For me personally, it has been interesting learning about Berkshire’s investment here. It started out as a potential arbitrage to copy and now my brain is trying to justify something else. Thanks for the comments folks. I’m not in the US, so great to get the customer perspective and hear from others that understand the situation better.
No. of Recommendations: 4
So the YouTube analysis I have watched talking about a 20% arbitrage opportunity is incorrect
It's not that it was incorrect (probably) but rather that the prices of the securities changed. SIRI's share price went down more than LibertySirius's share price recently. As I mentioned earlier, there are no natural buyers of SIRI shares at the moment (except for those covering a short position in SIRI stock or someone trading around an options position). It would be irrational for an investor in SIRI to buy SIRI shares when the Liberty trackers are at a discount and imminently converting to the same security. The exchange ratio is basically set at 8.4 with only minor tweaks at closing.
No. of Recommendations: 3
My car has the Sirius radio setup. I've never paid for it. Every year or so, one of the dealerships I get oil changed at will comp me a 3 month trial. With no credit card on file needed. I take the trial and am again reminded that I don't like any of the channels well enough to pay for it. Latest trial ended a month ago and I was not motivated to pay for it. There are some channels I like, but the playlists are so very short that during road trips I keep hearing the same songs. Sirius just doesn't seem worth the money to me.
No. of Recommendations: 3
Hello nola622 or others following Liberty SiriusXM,
Was just looking at LSXMK numbers. Does this sound correct to you?
SIRI SP $3.71
LSXMK SP $23.2/8.4 (exchange ratio) = $2.76 (is this math correct?)
If the deal closes in Q3 and the SIRI valuation was to remain at Friday's close (it could be higher, or lower), a LSXMK buyer today would get a 34% gain (3.71/2.76). More likely it will be less than that.
Then as the new company, with a free float joins the S&P500, there is an additional potential and likely re-rating higher.
If the deal closes in Q3, but the SIRI valuation falls, to the current LSXMK valuation, a holder would own a low growth business trading at a FCF multiple of:
7.6X 2024E (analyst estimates, which assume the business does not fall off a cliff)
6.3X 2025E
5.5X 2026E (capex falls significantly according to management).
The business reports earnings on 1st August and should have an update on the approvals (the main time consuming one, is the SEC approval of the proxy, going to LSXM shareholders, to approve the deal.)
Berkshire reported selling a small number of shares, but may have since sold more. That is a worry. Maybe they can see new car sales numbers, or something else has changed their minds about the FCF potential.
The biggest risk, is that the business reports weakening performance on subscribers, cashflows and earnings.
SIRI's SP is up 35% in the past week, 44% in the past month. What is causing this? Short squeeze? Bounce of extreme lows?
EVBigMacMeal (currently down 13% on this deal.)
No. of Recommendations: 0
Owning Sirius through Liberty Media is probably a better deal than buying SIRI.
Maybe. Myself, I am OK owning both through Berkshire for now. Not sufficiently convinced that it is, as you pointed out above.
No. of Recommendations: 9
Berkshire reported selling a small number of sharesBerkshire didn't sell any Liberty Sirius shares. You are probably thinking of a small sale recently of Liberty Live Nation shares, which is a different tracking stock.
https://www.sec.gov/Archives/edgar/data/1067983/00...SIRI just had another large short squeeze. It is not currently possible to short SIRI to capture the arbitrage spread with LibertySirius. Some market participants exiting their SIRI short in the squeeze may have been long LibertySirius in a spread trade trying to capture the arb. Those exiting SIRI shorts would be buying SIRI and selling their offsetting LSXMA/LSXMK shares to fully exit - further increasing the spread.
I don't know what price newSIRI will trade at after the deal closes. With LibertySirius at a huge discount to SIRI shares, there should be no natural buyers of SIRI shares other than those covering a short position / option position, or traders just trying to participate in the price movement from the squeeze. No fundamental investor would choose to buy SIRI shares as a long term investment (they would buy LibertySirius instead).
