Communications Sector

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>>> Sirius XM Stock Has a Good Debut as Independent Company. Berkshire Hathaway Becomes Top Shareholder.


Bloomberg

by Andrew Bary

Sept 10, 2024


https://www.barrons.com/articles/sirius-xm-stock-berkshire-hathaway-buffett-ca45b84c


An independent Sirius XM Holdings had an encouraging debut Tuesday, as Berkshire Hathaway emerged as the largest shareholder with an estimated 25% stake—replacing Liberty Media (FWONA) and its control holder, media mogul John Malone.

Sirius XM Holdings stock gained 2.6% Tuesday to $27.38, after trading as low as $24.43 earlier in the session.

A combination occurred late Monday of Sirius XM with Liberty Sirius XM Holdings, a tracking stock that held about 83% of Sirius XM shares. Sirius XM, the satellite radio company, also did a one-for-10 reverse stock split.

The merger caps what has been a poor year for the Sirius XM, which is down about 50% so far in 2024. The stock is off over 10% since the start of September.

The company provided updated financial guidance late Monday in conjunction with the merger. It reduced its projection for 2024 free cash flow by $200 million to $1 billion, reflecting several factors, including higher interest costs and year-to-date cash outflows at Liberty Sirius XM. That amounted to a modest disappointment, although revenue and Ebitda, or earnings before interest, taxes, depreciation, and amortization, projections were unchanged at $8.75 billion and $2.7 billion, respectively.

The combination between the two companies had been sought for years by Malone and Liberty CEO Greg Maffei to simplify Sirius XM’s structure, broaden its investor base to those who couldn’t hold tracking stocks, and potentially pave the way for its entry into some equity indexes.

Berkshire was the largest holder of the Liberty Sirius tracking stock, and now becomes the biggest investor in Sirius XM. The $2.3 billion stake in the company is believed to be managed by Ted Weschler; he is one of two investment managers that works with CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio. There was no immediate comment from Weschler.

Buffett is a fan of the satellite radio service and regularly tunes into its Siriusly Sinatra station that plays American standards when he’s driving in his Cadillac, Maffei said last year. The station plays songs performed by Frank Sinatra, Ella Fitzgerald, Billie Holiday, and others.

Sirius XM bulls point to the company’s low valuation at less than 10 times projected 2024 earnings and a 10% free cash flow yield. The stock yields about 4% based on a dividend of about 27 cents per share quarterly. The company’s share count fell about 12% in conjunction with the merger to 339 million shares.

The merger may wash out arbitragers who had been long Liberty Sirius XM and short Sirius XM to capture a spread that recently stood at more than 20%. In other words, these traders bought the tracking stock and sold short Sirius XM.

That could be a good setup for the stock if fundamental investors emerge to replace them. Free cash flow is expected to be higher in 2025 at $1.5 billion, Sirius has projected.

Negatives are ample debt of about $10 billion, or nearly four times projected 2024 Ebitda. The company’s target leverage ratio is mid-to-low three times. Sirius XM unveiled a $1.2 billion share repurchase program Monday, but said it plans to emphasize debt reduction with free cash flow until it meets its debt ratio goal.

Sirius XM stock has been hit hard this year for several reasons. The company’s revenue was down 5% in the latest quarter while self-paid satellite radio subscribers have fallen about 400,000 in the first half of 2024 to about 31.5 million. That has prompted concerns that the subscriber count will continue to decline and put pressure on the monthly subscription fee.

Weakness in cable TV stocks also has hurt Sirius XM’s valuation, which is now about seven times this year’s estimated Ebitda, in line with the major cable stocks.

Many investors had invested in the Liberty Sirius XM tracking stock because it long traded at a 25% to 40% discount to the value of its Sirius XM stake. But that strategy didn’t pan out well because of the sharp drop in Sirius XM stock this year which offset the discount.

That may have been the motivation for Berkshire’s involvement. It’s unclear what role Berkshire will play with Sirius XM but it usually takes a hands-off approach to its major investments—although it’s possible that Weschler or another Berkshire representative could join the board.

With a cleaner structure and Liberty essentially gone from the picture, Sirius could be in a position to deliver for investors after a tough year.

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