Last Friday, Liberty Media proposed to acquire the remaining 48% of SiriusXM it didn't already own via a tax-free stock swap. In it's conference call regarding the transaction, Liberty described several benefits, but in my opinion the largest benefit will be the enhanced capital structure of the combined company. Liberty will be able to borrow a larger amount against Sirius and use the proceeds for other investment opportunities as it sees fit.

One of the main concerns of many Sirius shareholders seems to be the fact that Liberty offered such a small premium over the most recent Sirius share price, which was in the range of 3.1% and 4.5% last week. Either the people complaining are not serious investors or just have forgotten that price does not equal value. In any all-stock transaction, one must consider the value the acquirer is giving up to acquire the company/assets.

Because Liberty is using stock to effect this transaction, the Sirius shareholder must come up with a reasonable estimate of the value of that Liberty share and then multiply that by the exchange ratio (right now it's .0253, but could likely go up a little bit with the recommendation of Sirius's special committee). The resulting number is the value per share Sirius shareholders will receive. Below is a table I created showing the variety of potential value per share Sirius shareholders might receive based on different fair values for Liberty and different exchange ratios.


Even with the base case of Liberty's fair value being $170 per share and the exchange ratio staying at 0.0253, Sirius shareholders are effectively getting $4.30 per share of value. Based on last Friday's closing price of $3.57, that's a 20% premium.

Furthermore, if Liberty really does buy Sirius for that $4.30, then they're effectively buying the business at nearly 22x EBITDA and about 27x free cash flows. Even despite the likelihood Sirius will continue to grow and will experience margin expansion, these are really high multiples.

In summary, when Sirius shareholders focus on the difference between price and value, I think they will realize they are getting a pretty good deal. Plus they will now be part-owners of a proven, money-making enterprise run by some of the savviest investors in the world who have done exceptionally well for shareholders over the long-run.


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