Upcoming Liberty Sirius XM Merger Update
Liberty Sirius XM on June 17, 2024 filed an 8K detailing adjustments to the exchange ratio that effectively reduces the shares outstanding post transaction. What are the consequences?
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On April 28th of this year I had published an article explaining the merger between Liberty Sirius XM holding (SIRI) and their tracker shares (LSXMA, LSXMB and LSXMK). You can find the whole article here: prior Liberty Sirius XM article posted
Last month Liberty Sirius XM did some additional SEC filings and changed the way the merger will be realized. I am not going to explain the former way, therefor you can read the prior article. In this article I will explain the new calculation. As this is quite complex and based on a 222 pages SEC filing I have tried to understand the new filing but always do your own due dilligence and let me know in the comments if you think I have missed something.
In the old way SIRI and the tracking shares where linked, where for SIRI you would get 1 new share for each share of SIRI and for the tracking shares you would get 8.4 new shares for each tracking share. This 8.4 is not in place anymore. All the investors who want to gain from arbitrage because of the undervaluation of the tracking shares and were betting long tracking shares and short SIRI, they might become nervous and close their positions just to be sure. This has resulted in a steep increase of SIRI share price of more than 30% since the announcement and at the same time hardly any change to the tracker shares.
Source: FinChat
As SIRI is 83.3% owned by LSX, the free float is really low. With 3.8B shares outstanding this would mean a free float of 643M. The short interest mid of June (can’t find a date later than this) was 153M, which means 24% of the free float has been shorted. I think shorts are closing their positions and there is a big chance this short squeeze will continue a bit longer.
Unfortunately for the Compound & Fire portfolio we own LSXMA tracking share (as those were and still are undervaluated) and we don’t see the same levels of share price increase for the tracker stocks.
The new SEC filing and merger conditions aim to reduce the shares outstanding post transaction.
As they want to reduce the number of shares for the tracker shares they will use an 0.83 exchange ratio.
The Exchange Ratio to determine the new share price is a calculation that is subject to a number of factors that will not be known until just before the closing, so I can’t make any calculation. However the filing states that prior to the closing of the merger, Sirius XM will effect a 1-for-10 reverse stock split. This means that for every 10 shares of Sirius XM stock (SIRI) a shareholder currently owns, they will receive 1 share after the reverse split. If we now take the total new shares Sirius XM and the current market value and we divide the 21.05B by 656.1M we will get to a price of $32.08. For tracking shares you won’t get 1:1 but you would get 0.83. If one would own 100 stocks now, meaning 100 * $22.76 = 2,276 dollar and 83 stocks of the new Sirius mulitplied by $32.08 this is 2,663 dollar or a 17% arbitrage. However the exchange ratio is an estimate provided and is subject to a number of factors and will not be known until just before the closing of the merger. This is because several factors that affect the calculation may change between now and the closing date, which include:
Changes in the market prices of SIRI and the LSXM tracking shares
Any adjustments in the shares outstanding
Other financial or operational considerations outlined in the merger agreement
The final exchange ratio will be announced and filed with the SEC when it is determined, typically very close to the closing date of the merger.
Conclusion
The new SEC filing suddenly published has implications for the different stocks. SIRI will likely trend upwards if shorts are closing their positions further. Question is whether this will have any impact to the tracking stocks, since the exact exchange ratio is not known yet. If we would assume the 0.83 exchange ratio is close to the final ratio, the tracking shares based on todays prices have a nice way to go.
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Disclaimer
The information in this article is provided for informational and educational purposes only.
The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.
None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.