Liberty Wants to Get Sirius; Should You?

LMCA is getting closer to taking control of Sirius XM Radio

By Will Ashworth, InvestorPlace Contributor

The last time I wrote about Sirius XM Radio (NASDAQ:SIRI) in May, I recommended investors forget about its stock and consider CBS (NYSE:CBS) instead. My rationale was simple: CBS is a much better company achieving sales and earnings growth similar to or better than the satellite radio operator.

It’s now the middle of September, though, and a lot has happened in the ensuing four months, making SIRI worthy of a revisit. Has Sirius XM Radio become a buy at this point? Let’s take a look.

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Liberty Media‘s (NASDAQ:LMCA) eventual takeover of Sirius XM inched a step closer Sept. 17 when Liberty filed with the SEC, saying that it has converted almost half the preferred stock it received when it lent Sirius $520 million in February 2009. It now owns 32% of SIRI stock, with the remaining preferred shares bringing the stake to 49.5%. And last month, it asked the Federal Communications Commission for permission to take control of Sirius.

It’s only a matter of time before Mel Karmazin, CEO of Sirius XM, is out, and a new board is in. Someone as successful as LMCA’s John Malone doesn’t do anything without a plan, so it will be interesting to learn what that is in the months ahead.

InvestorPlace contributor Jonathan Berr wrote Aug. 22 that the combination of Liberty and Sirius is a good one made better by the presence of Karmazin. While it’s true that Karmazin has worked some magic the past couple of years reviving the company, the CEO believes that when his contract expires at the end of the year, he’ll be shown the door — albeit with an $83 million parting gift.

Berr thinks Karmazin is crucial to Sirius XM’s future success. Liberty Media doesn’t see it that way.

According to sources, Liberty will begin a CEO search in early 2013. Karmazin considers himself one of the most underpaid executives anywhere. Frankly, his success boosting the subscriber base the last couple of years has less to do with his talent and more to do with the revival of the auto industry. Karmazin heaped $1.5 billion in debt on the company in 2008 as part of its merger with XM Radio. Down a little from its high of $3.2 billion outstanding in 2010, this is a business that owes its very life to Liberty Media.

Since my May 3 article, CBS’ total return is about 10% — roughly 160 basis points higher than Sirius XM and 380 basis points better than the SPDR S&P 500 ETF (NYSE:SPY). None of those, however, hold a candle to Liberty Media, whose stock is up 19.5% over the same period.

What should investors do?

My opinion of CBS hasn’t changed. It’s a great business with impressive media properties and excellent earnings and would make an ideal long-term holding. There is no comparison between it and Sirius XM.

For those who believe satellite radio has a future (I don’t see why it wouldn’t), the smart move would be to buy Liberty Media stock instead.

Greg Maffei, Liberty’s CEO, basically acknowledged at the Bank of America Merrill Lynch Media, Communications & Entertainment Conference that it would spin off Sirius XM at some point in the future, although it’s not something on their immediate radar. While there’s a chance the FCC could deny Liberty the opportunity to take control, the hit to its stock wouldn’t be nearly as great as what would happen to Sirius XM’s stock. Investing in Liberty gives you Sirius XM plus investments in 18 other companies, including CBS’ former sister company, Viacom (NASDAQ:VIAB).

If you must own Sirius XM, it’s safer and smarter to do so through Liberty Media. After all, it eventually will come back to you.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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