Time to Turn Dial From Sirius to Pandora
I know I am using a straightforward sample that many have already seen talking with financial planners, but Sirius is just as straightforward. The day of earnings the company reported about as good as can be expected and the stock still sold off. Now again today there is a buyer stepping up; Liberty media (LMCA) who already is the largest owner is buying an additional 300 million shares (from a float of ~6.5 billion shares). How does the market react to the largest shareholding increasing their holdings? The stock price gaps higher, only to move lower and fall continuously for much of the day before finally gaining support to close down another 2%.
After trending down for the past week, Sirius is due for a bounce, but the fact remains "normal stocks" shoot up quickly on news of a possible takeover. Sirius wasn't able to move up 15% and it's almost a penny stock. I see more life out of worthless pump and dump stocks after a decent email blast than Sirius demonstrates with a valid buyer.
How can this be? Simple, you're not looking at a buyout; you're looking at a buy under. It doesn't happen a lot, but I have traded them profitably before. Liberty media didn't get to where they are by overpaying for assets. If Liberty media is paying $2.15 a share for $650 million worth of Sirius and there is another party who agrees this is a reasonable price, don't you think perhaps $2.15 may be what Sirius is worth?
The market overall tends to agree Sirius is valued near $2.15 based on the final closing price. To argue otherwise is the same as stating both parties to the transaction are wrong and you are right.
Perhaps most ironic to the whole valuation process is the value the NOLs put on the table. A NOL is a net operating loss that can be carried forward against future profits. In a nutshell, if Liberty can gain enough control of Sirius, Liberty media is expected to use the NOLs against other profits. It's not the programming or subscribers driving the price this high it's the tax advantages.