Liberty SiriusXM Group - CASE STUDY 

Eric Schleien, Portfolio Manager

Q1, 2018

Investment Thesis

The Liberty SiriusXM Group is a tracking stock that tracks Liberty Media’s ~70% ownership stake in the common stock of SiriusXM. To understand what it means to be invested in the Liberty SiriusXM Group, we need to understand SiriusXM. 

SiriusXM is a safe, high-quality business, with near monopoly-like characteristics that is most likely going to be taken private within the next few years. Investors have the opportunity to purchase shares in the company at a 25% discount to the current stock price through the purchase of Liberty SiriusXM Group.

Business Overview

If you’ve ever listened to satellite radio, it’s likely been either Sirius or XM radio. These two satellite radio providers have worked to provide premium content to customers in their cars all over the United States.

With the prior virtual duopoly of XM & Sirius, these two companies ruled you’re in-car entertainment for years with nearly no competition. If you listened to anything other than regular radio before 2008, it’s because you paid for either Sirius or XM satellite radio.

In 2010, Sirius and XM merged and became one company, SiriusXM. As smartphones have become more prevalent over the years, it has given the joint company greater competition. 

However, this hasn’t affected the newly minted SiriusXM’s grip on the premium in-car entertainment market as one might think.

SiriusXM has had a distinct monopoly-like competitive advantage for years that makes it difficult for new players to enter the market due to the “network effect,” economies of scale, and costs to enter the market.

While competition has increased since in the form of smartphones that allow for streaming music and podcasts, Sirius XM still rules when it comes to in-car premium paid content because of its continued evolution in the face of this internet based competition.

Due to the lack of competition, SiriusXM has been able to grow Free Cash Flow (FCF) by nearly 200% within the past five years.

Shareholder Friendly Management

While we will never invest in an asset just because another prominent investor is doing so, if we do find a company we want to buy, and it's partly or mostly owned by a prominent value investor, that’s always a plus...

Especially when a master like John Malone controls a company we're buying a stake in. John Malone is a massive force in the media industry where he’s been an active investor for 40+ years.

His company Capital Cities merged with ABC in 1995 for a then-record $19 billion to become ABC/Cap Cities.  And he’s built most of his fortune off of buying and selling ultra valuable assets in the media arena.

A few years ago when doing our research on SiriusXM, we saw that Mr. Malone owned a majority stake in it through Liberty Media. This led us to make an investment in Liberty Media at a discount to the Net Asset Value (NAV) of the company.

As a way to close the gap between the stock price of Liberty Media and the NAV, Liberty split into three tracking stocks which tracked the different core assets of the company.

One of these tracking stocks was Liberty SiriusXM Group which tracked Liberty Media’s ownership in SiriusXM which is currently ~70% at the time of this writing.

However, the opposite has happened since becoming a tracking stock. The discount to Net Asset Value (NAV) has not only NOT closed, but it’s widened. As of this writing, Liberty SiriusXM Group trades at a ~25% discount to the NAV comprised of mainly SiriusXM stock.

We have used this as an opportunity to purchase more shares for our investors as GSCM.

Profitability/Balance Sheet/Buyback

Knowing what we know about monopolies, we would expect SiriusXM to produce massive profits and cash flow. It does not disappoint on either of these fronts.

Every year since 2011, its operating margins have always been above 20%; anything above 10% on a consistent basis is fantastic.

And every year since 2011; its FCF/Sales margins have been north of 13%; anything above 5% on a consistent basis is excellent.

After years of researching thousands of companies, we’ve only ever found a handful of companies with margins that are consistently this great.

We love monopolies.

So what does this mean for outside shareholders like us?

Because the company is a high margin business that spits out gobs of FCF, it gives us shareholders a higher degree of certainty in how we value the company, and it also provides the company with a lot of excess capital to deploy to shareholders. This can actually be a bad thing when a management team has a bad track record of allocating capital. However, John Malone who essentially controls SiriusXM through the Liberty Media tracking stock, has the best public track record in the industry in history.

Liberty has ordered SiriusXM's CEO to buy back massive amounts of stock in the past years, and they’re going to continue to do so.

At current rates, they’re buying back 5% to 6% of their own stock every year.  This means that within six years, all remaining shares not owned by Liberty could be bought back and retired.

We believe this gradual “going private transaction” will serve as a catalyst for the tracking stock to be valued by the market at Net Asset Value. We think the sole reason for the 25% discount the market is irrationally giving Liberty SiriusXM Group to the underlying SiriusXM asset on the balance sheet is due to a lack of demand for the stock because of institutional constraints which we talk about at the end of this document.

Valuation

So we love SiriusXM’s operations and near monopoly.  And we love that the best media investor in the world is involved with the company.

But what do we think Liberty SiriusXM is actually worth today?

There are two points we need to figure out:

  1. What is the current Net Asset Value of Liberty SiriusXM Group today?

  2. What do we believe SiriusXM to be worth?

As of March 1, 2018, SiriusXM Group was trading at $6.29/share making Liberty’s ownership of SiriusXM worth $19.9 billion dollars. If we add the cash on the balance sheet, the company’s stake in Pandora, and subtract debt, we get a value of almost exactly $20 billion dollars which comes out to or an intrinsic value of the company of $57.50/share. That’s a 25% discount to NAV based off a share price of $43.09.

This gives our investors a 33.3% upside on their money just for the NAV/stock price gap closing which we believe is likely to happen with SiriusXM being merged into Liberty serving as a potential catalyst.

As of the beginning of Q1 2018, SiriusXM was trading at ~17.5x TTM FCF or a 5.7% FCF yield. Our purchase prices through the Liberty tracker have allowed our investors to invest into SiriusXM at roughly ~10-13x FCF over time.

We think it’s likely that by 2020, SiriusXM will do 2.7 billion of EBITDA. If we apply a 14x multiple which is roughly what the market has valued SiriusXM at over the past 5 years, and we subtract an estimated 7.5 billion debt and add back the value of the companies tax credits and Pandora stake and then divide by the shares outstanding, we get a 2020 intrinsic value of ~$7.5/share which is a 19.2% premium to the current share price. 

This would equate to Liberty SiriusXM being worth $68.47 in 2020 or a 58.9% premium to the current stock price today. That equates to an IRR of 25.93% over the next two years.

This gives investors the opportunity to make money through the NAV discount narrowing or closing off completely plus any additional value that the underlying asset, SiriusXM creates over time.

Currently, SiriusXM is investing heavily into growing their business not only with new cars but also with used cars as well.

Going this route and getting into more used cars is not only cheaper than getting into new cars,  but a lot of the profits from this plan will drop straight to operating margin and free cash flow. This will further grow operating margins.

However, as nothing is ever guaranteed in the business world, we view this as another free option betting on the future of SiriusXM.

The advantage of being a boutique firm with no strict mandates

Many larger firms will not invest in tracking stocks or other unusual corporate structures. This leads to market mispricings as we believe is the case here. As a tracking stock, the company is not covered by many analysts, is not included in any of the major indices, and is essentially off limits to most institutional investors as neither index funds or mutual funds own tracking stocks.

This is, in our opinion, the sole reason for the mispricing of the SiriusXM tracking stock, the Liberty SiriusXM Group.