Liberty Media Corp (NASDAQ:LMCA) (NASDAQ:LMCB)’s proposed acquisition of Sirius XM Holdings Inc. (NASDAQ:SIRI) could aid in bidding for Time Warner Cable Inc (NYSE:TWC), notes Citi in its recent research report.
Greg Maffei, CEO of Liberty Interactive, recently spoke at Citi’s 24th Annual Global Internet meeting. Jason B. Bazinet and Christopher Lo of Citi summarized the key takeaways in their recent research report.
Liberty intends to make Sirius a wholly owned subsidiary
Last week, Liberty Media Corp (NASDAQ:LMCA) (NASDAQ:LMCB) announced its plans to make satellite radio provider Sirius XM Holdings Inc. (NASDAQ:SIRI) a wholly owned unit of Liberty. Douglas Country-based Liberty Media Corp has been keen on acquiring the growing 23 million-subscriber radio service since it bought a 40% stake in the business and saved the radio firm from bankruptcy with a $535 million loan.
In their recent research report, Citi analysts point out that if Liberty is successful in its offer for Siri, it would facilitate Liberty to put in place ‘more rational’ capital structure going forward and give Liberty access to Sirius’ cash flow.
Using Sirius’ cash flow
The analysts believe Liberty Media Corp (NASDAQ:LMCA) (NASDAQ:LMCB) intends to use Sirius’ cash flow as part of a bid for Time Warner Cable. Mr. Maffei, CEO pointed out at the Citi meeting that the bottom line is that the Sirius bid would give Liberty more flexibility and cash could be used towards share repurchases or other investments.
Moreover, by owning 100% of Sirius XM Holdings Inc. (NASDAQ:SIRI), it would remove any tax leakage related to a sale of shares or dividend issuance. Mr. Maffei believes, if the consummation is successful, investors would no longer value LMCA on a NAV basis but rather view LMCA as a levered equity return story as the discount to NAV is fairly small today compared to its historical discount, which exceeded 30%.
Other options for Liberty
However, in the event Liberty unable to complete the Sirius XM Holdings Inc. (NASDAQ:SIRI) transaction, Mr. Maffei pointed out in his recent Citi meeting that other funding mechanisms could come through a margin loan against equity stakes, a convertible bond issuance, short term loans from Liberty sister companies or equity issuance.
Liberty Media has 13% upside
Jason B. Bazinet and Christopher Lo of Citi point out it would be interesting to watch how much Liberty’s equity will rise after the additional shares of Liberty are issued and apply the appreciation to Liberty Media’s current equity value.
Citi analysts believe Liberty Media’s equity will reach $52 a share, offering about 13% upside. By applying this factor into the analysts’ current estimate of Liberty Media’s value at $142, the analysts believe a price target of $160 for Liberty Media looks feasible, which is $30 below their earlier price target of $190.
Earlier, Citi analysts pegged Liberty Media Corp (NASDAQ:LMCA) (NASDAQ:LMCB) price target by assuming that Sirius would reach $5 per share. However, considering Sirius XM Holdings Inc. (NASDAQ:SIRI)’ cash flow and balance sheet capacity will likely be used for acquiring additional cable assets, Citi analysts believe this is unlikely to occur.