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Sirius Decisions – A Look at the Owners

Researching Sirius XM Radio (SIRI) has been eye-opening, to say the least. For the last year or so, I have been blissfully ignorant as I coast the highway with all my favorites on the radio. Pick the station and enjoy the view, knowing that every song played is one of my choosing – a personalized station at the push of preset button.

I have already discussed why this company should hold a competitive advantage over its competitors such as Pandora (P). It would seem that even a great idea and support from big names in the industry among others doesn’t necessarily result in a well performing stock. This article takes a look at the decision makers for Sirius in effort to explain current stock performance and predict possible future movement.

Who’s On Board?

The first major player is, of course, the Chief Executive Officer Mel Karmazin. Ample analysis has been made of the performance of this leader.

The next notable is John C. Malone. In February 2009, then Liberty Media Corp Chairman, John Malone, agreed to throw a lifeline of $580M to Sirius XM to prevent bankruptcy. The investment by Malone in the form of high interest notes have been paid back in full by Sirius XM, leaving Liberty a beneficial ownership position of 40%, as the holder of 12.5M shares of Sirius XM. The value today of his ownership is approximately $3 billion.

Malone is not the only Liberty Director on the board. David Flowers, and Greg Maffei also fill seats, meaning Liberty possesses an indomitable say in the decisions of Sirius XM.

Jack Shaw is also an esteemed member. His connection with Globecomm Systems Inc. (GCOM) which provides satellite-based managed network solutions is significant. Globecomm offers a range of satellite-based communications solutions including infrastructure, hardware and software support for a range of satellite systems. His background helps the company get the equipment and technology together to make Sirius' products work for consumers.

Carl Vogel is another person of interest on the board of Sirius. Vogel has ties to Shaw Communications, a media conglomerate that is the biggest player in the Canadian broadcasting game. It goes without saying that this connection was key to capitalizing on the northern expansion of Sirius and made possible the merger of XM's Canadian affiliates into Sirius XM Canada last year.

Other Investors

According to a report released in 2006 by Sirius, in addition to four director investors, four others are subject to director designation agreements with GM (GM) and American Honda (HMC). At that time, GM owned roughly 8% of the Class A common stock and Honda owned 13%.

Currently, GM, Honda and Suzuki are all major investors in Sirius.

What it Means

The automobile investors should be easy enough to understand. They invest in a product that helps them sell their own product. A car sold without satellite radio is now more the exception than the rule. This year, Sirius now has an additional stream coming from the used car arena. GM, Honda, and several others are now offering XM radio through their used car dealerships. This new potential subscriber stream adds a little diversity and increases the pool that subscribers can be pulled from.

The investment holdings by Liberty Media is a bit more interesting. Several options could unfold in the next month. Currently, Liberty is limited to an ownership stake of 49.9% unless they do a tender offer for all shares. Next month, however, Liberty will have no restrictions on ownership percentages, meaning it could take a controlling share, take over the entire company, or sell its stock.

A controlling interest of more than 50% would allow Liberty to begin a Reverse Morris Trust, essentially selling off the subsidiary (Sirius) in a tax free deal.

What Will Happen

The company declared solid financial results for the fourth quarter of 2011. For the year it generated $543.6 million of cash from operations compared with $512.9 million in 2010. It also reported $604 million in cash and cash equivalents and a debt-to-capitalization ratio 0.81 compared with 0.93 at the end of 2010.

But looking at the strategy, it is clear that Sirius has relied more on muscling through than on solidifying it’s place in the future of radio. It has landed some exclusive events, most recently announced was its coverage of NASCAR and Whitney Houston’s funeral. These allow it to stay in the game, but not long term effectiveness as subscriber numbers are slowing and innovations are implemented only after competitors test the waters.

Liberty will act in the best interest of its shareholders. It is my prediction that this could mean trying to cash out, by selling its interest now, or taking control and farming it out. The idea of Sirius XM could be more valuable than the actual company.

It is not often that I find a so aptly put description of the Sirius condition:

Siriusneeds to show Wall Street that it not only understands, but is positioning itself for the future. And the future, as Netflix (NFLX) CEO Reed Hastings likes to say, is smart and social. That means multi-platform, accessible and seamless. Three-hundred dollar radios sold with "car kits" at retail no longer cut it.

Here's a relevant blurb from Pittman at an All Things D conference Tuesday:

What we build in radio are these incredible franchises. However our listeners want to get to those franchises is fine - whether it's radio, or Internet or TV ... Everyone's trying to protect business models, but in the end it's the consumer that rules and we have to deliver the content to them however they choose to consume it.

When you read the things Sirius XM executives say in this regard, it just sounds like satellite radio 2.0 is something the company has to do, but it's not part of the passion or vision that drives their future. Instead, they'll stick to protecting a business model.”

Summary

I don’t have enough good things to say about my satellite radio. I find it essential for my commute as probably do the 20+ million claimed subscribers to Sirius XM. It is with confusion and a twinge of sadness that I reach the ultimate conclusion of only modest positive stock performance.

These articles express how even stacking the deck with a great idea, a definite need/interest by the consumer, and even gathering heavy-hitters such as former media legend Karmazin and the movers and shakers represented on the board still does not guarantee success. It is my prediction that Sirius will continue to be a decent momentum play when investors have an appetite for risk, but the ultimate price catalyst would be a Liberty purchase. Given the current ownership structure, investors could be waiting a long time.

About the author:

InvestmentUnderground
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