Liberty's NAV Discount

Liberty Media's proposal to recombine Liberty SiriusXM Group (LSXMA) with Sirius XM Holdings Inc. (SIRI), is clearly a positive for Liberty shareholders and the catalyst to close the 40% NAV discount.

Liberty Media's proposal to recombine Liberty SiriusXM Group (LSXMA) with Sirius XM Holdings Inc. (SIRI), is clearly a positive for Liberty shareholders and the catalyst to close the 40% NAV discount.

In 2016, Liberty Media restructured into three tracking stocks: Liberty Formula One, Liberty Live Group and Liberty SiriusXM Group. The Liberty SiriusXM Group includes Liberty Media's 83% interest in Sirius XM. At today's prices, Liberty SiriusXM Group trades at a ~40% discount to its equivalent stake in Sirius XM.

Liberty is offering Liberty SiriusXM Group holders 10.3 SIRI shares per LSXMA share, while SIRI holders get a $0.55 dividend. The spread is over $14 per share for over 50% return if the deal closes.

A way to exploit this mispricing is by buying shares of Liberty SiriusXM Group (LSXM) before the proposed transaction is completed for $25, and you would receive 10.3 shares of the new SiriusXM worth $4.5 at today's prices according to the proposal. If the deal is completed, that is a $40 offer price for a +50% return. The arithmetic works out as 10.3 times $4.5 (adjusted for the $0.55 dividend).

It is possible that the deal is terminated as the proposed combination is still subject to approval by the Sirius XM board of directors. Additionally, SIRI is expensive to borrow, so the ability to hedge directional risk from a decline in SIRI's share price is limited. Risks to our arbitrage include a worsening of SiriusXM's fundamentals, a negative rerating of SiriusXM's valuation, or a tax-free transaction being disallowed or deemed taxable by the IRS.

In my opinion, Liberty is highly motivated to reach a definitive agreement in order to achieve the goal of eliminating the NAV discount. SiriusXM is also motivated to reach an agreement because a merger would benefit SiriusXM by reducing stock price volatility that is driven today by a very limited public float. Additionally, eliminating the existence of a controlling shareholder qualifies SiriusXM for greater market index inclusion and adds to the credibility of the offer.

To conclude, buy Liberty SiriusXM Group (LSXMA) and short Sirius XM Holdings Inc (SIRI) for a +40% return. Deal timing is uncertain but a Q124 completion is possible.

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Disclaimer:

The information and opinions expressed on this blog are for informational and educational purposes only and should not be construed as financial advice, investment recommendations, or solicitations to buy or sell any securities.