Liberty Media (NASDAQ: LMCA ) is a great media holding company and its investments have increasingly become more valuable. The diversified company, controlled by John Malone, owns wide-ranging holdings in media, entertainment, and communications. The company trades at a discount to its intrinsic value and the value of its holdings is rising. As the gap between share price and net asset value shrinks, Liberty Media will become a lot more valuable.
Sirius will grow subscribers
Liberty Media's publicly traded subsidiary, Sirius XM (NASDAQ: SIRI ) redeemed the first tranche of its $500 million share repurchase from Liberty for $160 million in the last quarter at a price of $3.66 per share. However, the companies decided to put the brakes on redeeming the remaining two tranches, which include another 93 million shares, until Sirius's special committee comes to a decision regarding Liberty's proposed all-stock acquisition offer for the remaining 48% of Sirius XM which Liberty doesn't currently own.
There's a decent probability that the committee will ask for a higher purchase price from the current exchange ratio which amounts to $3.68 per share. A stock transaction might be beneficial for Sirius shareholders because it will be tax-free, and also because Liberty's stock trades at a discount to its net asset value of close to $160 a share.
Sirius expects to add 1.25 million subscribers in 2014 and it also expects to generate revenues of close to $100 million from the acquisition of the telematics services unit of Agero in 2014. Since a substantial portion of Liberty Media's stock price is tied to the market value of Sirius XM, the future of Liberty Media is heavily dependent upon the performance of the satellite radio giant.
Sirius could fly higher
Speaking of highly valued stocks, Sirius XM Holdings shares are getting a lift this morning from analysts at Australian securities firm Macquarie. Upgrading to outperform and raising their price target to $4, Macquarie says Sirius is likely to grow its business well over the next three years. Meanwhile, the analyst thinks the company's negotiating position vis-a-vis Liberty Media (LMCA) is getting stronger as well, potentially yielding a better buyout price for shareholders if the takeover plans succeed.
I agree. While it's hard to gauge the takeover battle, Sirius shares do not appear overvalued today, and are likely to rise in future months. For although the company trades at a seemingly steep P/E ratio of 59, the truth is that with $929 million in positive free cash flow to its credit (versus reported net income of only $377 million), Sirius is far cheaper than it looks.
I calculate a price-to-free cash flow ratio of 23.5 on the stock -- which is reasonable given its projected 22% annualized growth rate over the next five years. Assuming a strategic buyer is forced to pay a good-size premium to fair value to capture the company, Sirius shares could very well rise to the $4 that Macquarie is projecting.
Sirius XM Holdings Inc. (SIRI) closed at $3.55 and is still under its supposed buyout price. Macquarie has raised the rating to Outperform from Neutral and believes that Sirius is worth $4 per share, versus a prior $3.75 price target. The firm believes that the minority shareholders are now in a better bargaining position, and it sees growth ahead in the next three-year period.