Warren Buffett's Berkshire Hathaway keeps buying Liberty's SiriusXM tracking shares. Here's why

Published Sun, Jan 28 20243:37 PM EST

Berkshire Hathaway continued to buy Liberty Media's tracking stock for New York-based satellite radio company SiriusXM in a likely merger arbitrage play. Billionaire John Malone's media conglomerate currently owns 84% of Sirius XM and has two tracking stocks that represent that stake in the streaming satellite music service — Liberty Media Corp. Series A shares, or LSXMA , and Liberty Media Corp. Series C shares, or LSXMK . The remaining 16% trades on the Nasdaq under the SIRI ticker symbol. In December, Liberty Media said it would simplify the ownership structure by combining the two tracking stocks with the rest of the radio company, with the new combination trading under the ticker SIRI. Under the terms of the deal, expected to close early in the third quarter, each Liberty Media Sirius tracking share will be exchanged for 8.4 "new" SIRI shares, while "old" SIRI shareholders would receive new shares in a one-for-one exchange. Here's why Buffett's bet could be lucrative. Based on Friday's closing price of $5.34 for Sirius XM Holdings, the offer values the Sirius tracking stock at $44.86 a share (8.4 x $5.34), or about a 45% premium to both the Series A and Series C shares. Berkshire loading up In the past week, Warren Buffett's conglomerate added 438,945 shares of LSXMA and 1 million shares of LSXMK for nearly $45 million combined, according to regulatory filings . Earlier in the month, Berkshire had bought about $85 million worth of the tracking stocks. Because the Sirius arbitrage cost less than $1 billion of committed capital, and because Buffett has never mentioned it publicly, it may also be the work of the billionaire's investing lieutenants, either Ted Weschler or Todd Combs. Berkshire first bought LSXMK in 2016 and now owns almost 22% of the tracking stock, according to FactSet. (Seth Klarman's Baupost Group , another value investor, is the second largest institutional holder with almost 7%.) LSXMK and LSMXA have both gained about 8% in January and each have climbed more than 15% from about $26.80 or so on Dec. 11, the day before the deal was announced. The currently traded SIRI has dipped more than 2% this year. SIRI overvalued? Now, some Wall Street analysts believe that the currently traded SIRI could be overvalued, which would make the upside in Liberty trackers smaller. Wells Fargo analyst Steven Cahall downgraded SIRI to underweight from equal weight on Tuesday, estimating the post-deal fair value at $4.50 per share, or about 10 times enterprise value to EBITDA. "The stock has rerated from its pre-deal valuation perhaps due to merger mechanics, but we think it will retrace nearer closing," Cahall said in a note. "SiriusXM is in a rebuilding phase to reaccelerate subscriber growth via streaming-only subs and improved engagement/conversion of in-car subs through its nextgen app," Cahall added. "This means more expenses near-term, flatter ARPU and EBITDA growth pressures." Citigroup analyst Jason Bazinet values SIRI at $4.10 after the deal closes, using a multiple of 9 times EV/EBITDA. He recently maintained his sell rating on SIRI. 'Workouts' Still, this is a merger arbitrage play that the "Oracle of Omaha" dabbles in occasionally. Buffett revealed in 2022 that he scooped up Activision Blizzard stock, successfully betting that Microsoft's proposed acquisition of the video game company would not be blocked by regulators. The legendary investor previously said that he and his late business partner Charlie Munger started doing merger arbitrage deals five decades ago, when he called them " workouts ." "Charlie and I, 50 years ago, we used to do a lot of that sort of thing...we spent a lot of time analyzing the probabilities of announced deals going through," the Berkshire CEO said in 2022, referencing the early 1960s buyout of British Columbia Power . The technique "hasn't worked overall too well in recent years," he added. Buffett said he did an arb play with agrochemical company Monsanto a couple years ago when Bayer AG acquired it. He also used the same investment technique with software company Red Hat, which was bought by IBM in 2019.