Over the past 6 months, Warren Buffett
increased his position in SiriusXM by 40% and now owns 27% of the company. This
company is undergoing a merger with itself, and there is the possibility of making money
by arbitrage and also a short squeeze. Wait, what? A merger with itself? Yes, this is one
of the most complex corporate structures I have ever seen. I spent days trying to understand it:
how Formula 1, Atlanta Braves, and Ticketmaster were once part of the same company and how all of
t
his integrates into the empire of John C. Malone, the second-largest private landowner in America,
who controls 49% of this company. This deal is supposed to simplify things, and we can also
profit from it, just like Warren Buffett and Seth Klarman, another billionaire value investor
who owns 9% of Liberty SiriusXM. Value investors don't usually like companies with a lot of
debt, and this one is drowning in debt. This should not be an issue because this is the
investing side of John C. Malo
ne, and also, this company has high cash flow generation,
which value investors like. Instead, what value investors like are moat, and
this company has a very strong one. It is raining, so it's better we go inside.
SiriusXM did not always have a moat and was not always a cash-generating machine. In the
1990s, there were two satellite radio companies that were created, which dominated the market:
Sirius Satellite Radio and XM Satellite Radio. These two companies competed against each other,
and they had a duopoly in the market. You see where I'm going with this? But satellite radio
was not an easy business to launch and operate. With terrestrial radio, it is easy to set up the
antennas, the amplifiers, the whole infrastructure in order for the business to operate. So,
if let's say you're listening to the radio, whether it's AM or FM, you just have to tune
in to the right frequency, and you're going to get the signal. It is quite an easy business
to operate. For those business
es to make money, they sell ads. So, you're listening to the
radio; sometimes you have a song, and then you have an ad; you have another song, you have
the news, and an ad. So, you keep getting these ads. That's how these businesses make money. But
this business has limitations because if you're in a certain area and you're capturing the signal
of a certain frequency, once you leave that area, you don't capture that signal anymore,
and you're going to miss it. For example, you're going on a
trip somewhere else;
you're listening to a program in your car, but once you leave that area, you cannot get the
signal again. And also, the quality is not that good. If you are going into the wilderness, you're
not going to get any signal at all. That's where satellite radio solved this problem because,
with terrestrial radio, everything is on Earth; with satellite, it's in space. As I told you, this
is a costly business to launch and operate. Today, it is quite easy, we can say, to send
satellites to space, but 20 years ago, that was not easy. It was costing a lot of money
to send satellites to space. So, these companies, they had to find another way in order for
them to make money, and they did that through a subscription business. But the competition
continued with the terrestrial radio stations; that was the main competition because it is
easier for you to just listen to an ad rather than subscribe to something. That's why we have more
people watching YouTube for free,
with the ads, rather than paying for YouTube Premium without the
ads. They found a way to differentiate themselves from the competition, and that was by partnering
with auto manufacturers. Every new car that was purchased had a default satellite radio in it with
a trial subscription, and many people actually continued to pay after the trial ended. Some
cars had XM radio, others had Sirius radio. So, they were competing, not just with the terrestrial
radio stations but also with each other,
and that was costing them a lot of money. They took on a
lot of debt to set up the infrastructure and to fight each other and to compete with each other,
and they were both on the brink of bankruptcy. And that's where they decided that it was best
to merge. From a duopoly, now we had a monopoly. Sirius XM was born as a single company operating
satellite radio in the United States of America. But the problem did not get solved because the
financial crisis of 2008 happened. That's where John
C. Malone got involved. He lent the company
$530 million in exchange for 40% ownership, and gradually he increased his ownership through
private transactions and also through open market purchases. And that's how today he's the
largest shareholder of SiriusXM. Usually, when such deals happen, the old shareholders
are wiped out. Even if, let's say, the company went bankrupt, if you're an old
shareholder of the company, everything you own, most of it is going to zero. But for the new
shareh
olders, now they have a company with a much better balance sheet. With John C. Malone coming
into the business, without the competition, with infrastructure costs getting lower, and with the
two businesses now as one, SiriusXM flourished. Now, you might be wondering why the US government
allowed this merger to happen. Why did the government allow the monopoly to form? First
of all, the two businesses were going bankrupt, so it was one of the best things to do
in order to save both of them.
Secondly, because the US government saw that they were not
going to be a monopoly anymore because there was new competition: the internet. The major
competitors of SiriusXM today are Spotify, Apple Music, Audible, and even YouTube.
And that's why the right time to smash the like button is to show YouTube
that you are enjoying this video. In 2008, SiriusXM acquired Pandora, a music
streaming service, and today SiriusXM has 34 million subscribers. This number is not growing
that much; actual
ly, if you look over the past few years, the number has been declining slightly.
That's because they have raised prices. Revenues peaked in 2022, and it's not declining that
much now; it is fluctuating around $8.8 billion US dollars. If you look at the free cash flow
of the company, it has been declining. Capital expenditures have been increasing, but still, $1.2
billion US dollars per year in free cash flow, that's around a 13% profit margin. This is good,
in my opinion. Much of the expens
es also come from debt. If you look at most of the companies
that John C. Malone controls, owns, or even has influence in, you will see that most of them are
heavily indebted. For example, Qurate Retail. And there is another theme you can see in most of his
companies: they name Liberty. He's a libertarian, so Liberty Latin America, Liberty Global, Liberty
SiriusXM, Liberty Media, Liberty TripAdvisor. It means that he's someone who will try his best
not to pay taxes. So what he does instead,
he finances his companies with a lot of debt. This
reduces his tax expenses because debt usually is not taxed, but of course, the companies then
don't have such a good balance sheet anymore. Liberty Media doesn't own just SiriusXM; they
also own Formula 1 and Live Nation. All three companies are under one single entity. So, if you
look at Liberty Media today, they are the parent company to these three companies. But you can also
invest in tracking stocks. This is different from, let's say,
Berkshire Hathaway. In Berkshire
Hathaway, if you're investing in the company, you have to buy everything. You cannot invest
in Geico separately, you cannot invest in Berkshire Energy separately, you cannot invest
in BNSF separately. You buy the whole company, the whole conglomerate. In the case of Liberty
Media, you can invest in different tracking stocks, for example, Liberty SiriusXM (LSXMA,
LSXMB, LSXMK). These are the tracking stocks for SiriusXM, while there are tracking stocks for
Formula 1 Group, tracking stocks for Live Nation. The next question might be, why three
tracking stocks for Liberty SiriusXM? It all comes down to the voting powers of these
shares. For example, the Liberty SiriusXM Series A shares (LSXMA) have one voting right. The B
shares, which are mostly owned by John Malone, have 10 voting rights. That's how he has control
over the company. And the Series C shares, the ones ending with K, have zero voting rights.
If you look at my portfolio on eToro,
you will see that I own both the Series C and the Series
A shares. There is no particular reason for that; I just decided maybe it's a good idea to buy both
of them. And this is not sponsored in any way, but you can always follow and copy my investments on
eToro. I am an Elite Popular Investor there. You can have a look at my portfolio. If you like my
strategy, you can copy my investment. For Warren Buffett, it makes sense for him to buy Class A and
Class C shares separately because he's bu
ying a lot of shares, and this can cause liquidity
issues. If you're buying a lot of shares, you need to find the shares, and if he buys only
one class, a lot of the shares are not available, the prices are going to go up. So, it's better
for him to buy Class A and Class C shares. You can also buy the SIRI shares, and
this is SiriusXM as a company itself, without Liberty. Warren Buffett has also
bought the SIRI shares, but this might be because of the deal that is going on, and for
tax pur
poses, he has done this. But 84% of SiriusXM is owned by Liberty SiriusXM. When you
look at the stock price of the two companies, you will see that there is a spread. So, if you
look at the market cap of the two companies, one of them should be 84% of the other. SiriusXM
(SIRI) should be bigger than Liberty SiriusXM because it is 100%; the other is only 84%, but
it is much more expensive than Liberty SiriusXM. To understand why this spread exists, we need to
look at the balance sheet of the
two companies. At first glance, it seems that Liberty SiriusXM,
with $29.9 billion in assets and $10.1 billion in equity, has a better balance sheet than SiriusXM
(SIRI), with only $600 million in equity and $13.5 billion in assets. But we need to understand what
actually these assets are because the math doesn't add up, and it has to do with accounting. If you
look at the balance sheet of SiriusXM, you will see that they have goodwill of around $3 billion
US dollars and also intangible as
sets; these are FCC licenses. But then, if you look at Liberty
SiriusXM's balance sheet—and here, you have to be careful because the balance sheet is for Liberty
Media—so you don't take into consideration Formula 1 and Live Nation, you will see $15 billion in
goodwill and also over $8 billion in FCC licenses, and these are categorized as unamortized
assets, unamortized intangible assets. What is actually goodwill? Whenever you are
buying a company, if let's say the book value of the company
or the assets minus liabilities is
$10 billion dollars but you're paying $13 billion, the $3 billion you're paying extra is counted as
goodwill and it is added as an intangible asset on the balance sheet. That's why you have the
goodwill there. But since they are the parent of this company, they own 84% of it, because
of accounting, the goodwill is never amortized, so it will stay the same forever, but
this should not be the case. Besides, goodwill is here only for accounting purposes;
by
itself, it doesn't represent any value. As for the FCC licenses, it is the same,
only with SiriusXM, they are amortized, but for the parent company, they are not
amortized, but these are the same licenses. So the extra intangible assets with the licenses
don't have any real value; it's just there on the balance sheet. So, in reality, the balance
sheet of SiriusXM is better than that of Liberty SiriusXM. And this is because the parent
company has additional debt on its balance sheet. Whenev
er we are calculating the intrinsic
value of a company, we look at how much cash flow the company can generate over its
lifetime. We discount these cash flows, and then we add the net cash of
the company because, in theory, this is the amount of cash that they can
return to shareholders over its lifetime. We do the same thing for these companies, but
here we have to take into consideration that only 84% of SiriusXM is owned by Liberty
SiriusXM. In addition to that, you have to add the cash
held by the parent company and
remove the debt held by the parent company, and you will see that because of this extra debt,
Liberty SiriusXM should be priced lower compared to SiriusXM. And it's not just because of the 84%
ownership; that's why the market understands this, and SiriusXM is priced higher compared to
Liberty SiriusXM, and this creates a spread. One of the reasons why this merger
is happening is to remove the spread, and one way we can profit from a spread is by
arbitrage. W
hat exactly is arbitrage? Let's say there is a stock being sold both in New York
and in London. Taking into consideration all currency exchanges, all fees, the shares in
London are traded lower compared to that in New York. What you can do is that you buy the
shares in London, let's say for $100 a share, and you sell them in New York at $105, so you make
a 5% profit. This is free money you're making; this is arbitrage. Another way you can
make arbitrage if a deal is happening, let's say the
acquisition price is $100, but the
stock price today is only $90. You can buy at $90, and then you take a profit at $100 once the deal
closes. This is another type of arbitrage. Warren Buffett has been doing this type of arbitrage a
lot, and the last one he did was with Microsoft acquiring Activision Blizzard. He invested in
Activision Blizzard, and he knew that eventually, the price that Microsoft was paying, he was
making money on the spread by arbitrage. How will the merger happen? Libe
rty Media is going
to split Liberty SiriusXM, which will then acquire all the shares of SiriusXM through an all-stock
transaction. For every 8.4 shares of Liberty SiriusXM that you own, it doesn't matter whether
it's Class A, Class B, or Class C, you're going to obtain one share of SiriusXM. So, if you own 8,400
Class A shares and you own 400 Class B shares, everything will be converted to 1,000 SiriusXM
shares. It doesn't really matter which class of shares you own; everything will be conv
erted at
the same rate. And where did they get that 8.4 figure? They worked on a plan to equalize the two
balance sheets. They took into consideration the extra liabilities of the parent company, and these
extra liabilities are counted as diluted shares in a way, increasing the number of shares of the
parent company. So, how many shares there are in total, taking into consideration that it's only an
84% ownership, they equalized both balance sheets. SiriusXM shares are around $4.04 today,
and if you multiply it by 8.4, you will have $33.85. But if you look at LSXMA, it is
valued at only $29.63. This means that there is a spread of around 14%. If you own the shares
of Liberty SiriusXM today, the Series A shares, and then it is going to be converted into SiriusXM
shares, you get more money because the shares are valued at $29.63 today, but when the conversion
happens, let's say it happens today itself, the shares are going to be valued at $33.85.
So, there is the spread; in a
way, you're making money for free. This is one form of arbitrage.
Arbitragers have attempted to take advantage of this spread. In order for them to make money, they
have to lower the spread. So, how do they do that? They can buy the shares of Liberty SiriusXM
and then they short the shares of SiriusXM. How exactly shorting is done is that they have to
borrow the shares from someone and then they sell it in the open market. Later on, if they are right
and the price goes down, they buy the sh
ares back, return it to the person, to the rightful owner.
But let's say they sold the shares at $100, but they are buying it back at $90, so they make
a 10% profit. Of course, this is a gross profit; they have to pay an interest because they
have borrowed the shares. And right now, 25% of the float of SiriusXM is shorted. What is
the float? It is all the shares of the company that is publicly traded. So, we say that 84%
is owned by Liberty SiriusXM; this is not considered as float because
it is not traded;
it is owned by the company. But the other 16%, this is float. So, 25% of float that is traded,
it means that 25% of all these shares, eventually, have to be bought back. If the short sellers want
to make money, they have to eventually buy back their shares. This is how shorting works; there
are these two transactions that have to be made: you have to sell the shares after you have
borrowed them, and then you have to buy them back. And with this deal happening, many of thes
e shares
will need to be recalled because the owners of the shares, they would want to exercise their voting
rights. And this can lead to something that we call a short squeeze. A short squeeze happens
when the short sellers are not finding enough shares for them to buy back, and if all of them
want to make profits, they will eventually have to buy back their shares. And whenever you are
buying shares and there's not enough shares for you to buy, of course, the prices of these shares
are g
oing to go up. This is what we call a short squeeze. Since the conversion rate, the 8.4,
doesn't change at all, it means that even the shares of Liberty SiriusXM, when the deal goes
through, when the conversion actually happens, and if really a short squeeze happens with
SiriusXM, the spread is going to actually increase, and you're going to make more money.
Eventually, let's say now the shares are $33, we have a short squeeze, it goes to $40,
if you buy Liberty SiriusXM at $29 today, event
ually you're going to be selling at $40.
You could profit from either SiriusXM or Liberty SiriusXM shares, but it is better you do it for
Liberty SiriusXM because this short squeeze, it is always a bonus. Don't bet on that; you don't
know what is going to happen. It is better to bet on the arbitrage; there is always more certainty
in arbitrage rather than a short squeeze. But in this case, if the best case scenario happens,
you have arbitrage and a short squeeze at the same time. It is an o
ld video but if you
want to understand how short selling works, how to profit from it, please have a look
at this video. Have a nice day and goodbye.
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