One of the real strong points in the U.S. economy has been vehicle sales, which have steadily increased over the last four years and finished 2013 at the highest level in seven years. And one of the beneficiaries going along for the ride (so to speak) has been Sirius XM Holdings (SIRI). The stock of this satellite radio company has more than doubled over the last two years as more cars with satellite radios mean more paying customers for the company. Recent news popped the stock nearly 10% last Friday and this past Monday, and I’ve been waiting for bit of a pullback for us to get in. We now have that chance.
New Position: Sirius XM Holdings (SIRI)
Type: Large-Cap Stock
Allocation: 2%
Strategy: Buy at $3.77 or Less
After hitting a 52-week high of $4.18 back in October, SIRI drifted down under $3.50 for the last part of December. It woke up again last Friday on word that Liberty Media (LMCA), which owns about half of Sirius XM already, is offering to buy the other half of the company at $3.68 a share to make it a wholly owned subsidiary.
SIRI traded as high as $3.64 on Friday, but the stock jumped more than 7% Monday to close at $3.83 – 4% above Liberty’s offer – as investors are clearly expecting a higher offer after much of the initial reaction was that Liberty’s bid is too low.
Liberty, run by John Malone, actually loaned SIRI money to keep it afloat several years ago in exchange for equity, which it has increased through the years to become the majority shareholder. Its initial $1 billion investment is worth about $10 billion today. The effort to acquire all of SIRI seems to be part of a larger plan for Liberty, which also owns a large stock in Charter Cable, which has tried and is expected to again try to buy Time Warner Cable (TWC). SIRI’s strong cash flow would provide more capital for the deal.
A higher bid is very possible, as I don’t see any way the Sirius XM board and current shareholders would approve the current offer. Another potential positive: The deal as currently proposed is an all-stock transaction. Each SIRI share would be converted into a new category of Liberty stock called class C shares, which would then be given to Liberty shareholders on a two-to-one basis. In the end, SIRI shareholders would own about 39% of Liberty. I think interest in the new shares would be high.
Buy SIRI under $3.77, which is the lower end of its recent range, and make it a 2% position in your portfolio. There’s certainly a lot of activity around both the company and the stock right now, and as with Hertz that we just added, I expect the buzz to continue to be good overall for SIRI. That said, I didn’t want us to chase it, and we’ve gotten enough of a pullback now that I like our entry point as I see more upside potential and less downside risk.