Yesterday, Liberty Media Corp. (LMCA) received a shot in its arm as the Federal Communications Commission (:FCC) has approved the transfer of control of broadcast licenses of SIRIUS XM Radio Inc. (SIRI). Theoretically, it means that Liberty Media can now control more than 50% of SIRIUS XM. At present, Liberty Media controls 49.9% stake of SIRIUS XM and was waiting for the FCC nod to have a decisive controlling power.
SIRIUS XM is the largest satellite radio broadcaster in the U.S. with around 23.4 subscribers in its kitty. After Comcast Corp. (CMCSA), the company is the second largest entertainment service provider in the U.S. with respect to subscribers count. Liberty Media is expecting to assume decisive control of SIRIUS XM within 60 days of gaining FCC approval.
In 2009, SIRIUS XM was facing severe financial crunch, during the time of great recession. Significant downturn of the auto industry jeopardized SIRIUS XM’s revenue as the company is mostly dependent on the auto sector (automobiles with inbuilt commercial radio network) for its survival. At that juncture, Liberty Media provided $535 million in loan to SIRIUS XM to avoid bankruptcy. That loan was in lieu of a 40% stake of SIRIUS XM given to Liberty Media through preferred shares.
During the last couple of years, SIRIUS XM has successfully turned around its businesses. We believe the turnaround of SIRIUS XM makes Liberty Media interested to get full control of the former. In May 2012, FCC dismissed an application by Liberty Media to de facto control SIRIUS XM. Following which, Liberty Media filed a new application to the FCC, in which the company stated its intention to acquire more than 50% of SIRIUS XM, so that it can take full control of the Board of SIRIUS XM.
SIRIUS XM maintains its strong performanceprimarily due to impressive management execution on the back of rising auto industry sales. Management has raised the financial outlook for the fourth quarter of 2012 and expects the growth momentum of the company to expand further. Despite price rise of its services, SIRIUS XM maintains its churn rate. Solid conversion rate and an effective marketing strategy helped the company tostrengthen its financials. We believe the company will generate huge financial synergies to Liberty Media over the long haul.
We reaffirm our long-term Neutral recommendation and short-term Zacks #3 Rank (Hold) on both Liberty Media and SIRIUS XM.
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