I love it when moguls spat. In this case, the moguls are the brilliant investors John Malone of Liberty Media (NASDAQ:LMCA) and Mel Karmazin of Sirius XM (NASDAQ:SIRI). To understand exactly what’s going on, you first must remember that Liberty saved Sirius in 2009 by providing it a half-billion loan. In exchange, Liberty got preferred shares that gave it a 40% stake in the company.
If you know John Malone, then you know that sooner or later he’d try to take over the whole thing. There was even a clause in the deal that prevented Liberty from owning more than 49.9% for a period of — guess what — three years after the deal closed. So the recent news that Liberty asked the FCC to turn over licenses and ground operations to Liberty, giving it de facto control, shouldn’t come as a surprise.
The real question is exactly what Liberty is planning to do. Mr. Malone is known for his complex transactions, in which he seeks to both monetize an investment and do so in a manner that reduces or eliminates any tax having to be paid. The ultimate ownership percentage Liberty is aiming for is tied to exactly such complex rules regarding taxation. Some of these involve getting Sirius’ blessing, and others require the FCC’s.
Indeed, what’s the point of Liberty taking over control of Sirius if the FCC won’t grant it the licenses it requires to operate? Whoever controls the licenses has more leverage, so it makes perfect sense that Liberty and Sirius should be requesting them. In addition, Liberty is floating a request to see if the FCC would have a problem with obtaining licenses. Why bother to go through the trouble of grabbing more control of Sirius if the FCC won’t bless the deal?
Which brings us to the investment opportunity in this conflict. For starters, I would never bet against John Malone. He’s been doing complex deals for a very long time, and you can bet he knew how he wanted all of this to play out when he made that loan three years ago. The lender always has the advantage over the borrower.
I would view Sirius not as a trade, but as an investment, and this article explains why. As such, I would consider going long Sirius as this point. With Liberty’s support, I believe the company will continue to do very well. I would also suggest going long Liberty Media stock, which allows you to own Sirius (which makes up a large chunk of Liberty’s market cap) as well as Liberty’s other great businesses.
If you insist on playing options on this situation, then I would buy the January 2013 2.50-strike calls for a mere $0.25 per contract. With the stock at $2.33, I would imagine at least a slight uptick when and if Liberty purchases more of the company. Gains are potentially unlimited for a long call while losses are capped at the premium paid. Breakeven for this call, at expiration, is $2.75.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.