This week marks the start of my tenth year as a Contributor at Seeking Alpha. My first article was on Sirius XM Holdings (SIRI), and took an in-depth look at its subscriber model. In the years since then, Sirius has undergone a number of significant changes, but there are two thing that haven’t changed much over the years. I have continued writing articles on Sirius, and Sirius has continued to focus on growing its subscribers.

Among the more significant changes at Sirius was Liberty Media (LMCB) moving from an owner of approximately 40% of Sirius to more than 70%, Sirius’s purchase of billions of shares of its own stock, its purchase of the Connected Vehicle Services business from Agero and the purchase of Pandora Media. Sirius also made a couple of smaller purchases, added millions of subscribers, billions of dollars of debt and, more recently, in 2016 caught the interest of Berkshire Hathaway (BRK.A) (BRK.B). This article will focus on the Berkshire news and price movements of the Sirius and Liberty shares.

Warren Buffett, the longtime chairman of Berkshire, is one of the wealthiest men in the world. He has been nicknamed the Oracle of Omaha (home to the headquarters of Berkshire) and has often been acknowledged as one of the best investors of all time. So, when it is revealed in the Berkshire quarterly 13F filings that it has initiated a new investment position, or increased or decreased a currently owned position, the market will often respond by sending those shares higher on a purchase and lower on a sale. This price movement has often been referred to as the Buffett effect.

It was mid-February of 2017 that Sirius shareholders first found out that Berkshire was buying shares in the company. By looking at the relevant 13F filings, and the subsequent Form 4s, we could see that the earliest of these documents were signed by Ted Weschler, one of two investment managers hired by Buffett. We could also see that Weschler and his wife personally owned shares of Sirius. By that time, the shares had already started rising from $4.74 to $5.52. Soon after those initial purchases were made, Buffett also began purchasing shares. Before the buying stopped in 2017, Berkshire had acquired more than 172 million shares of Sirius, shares that would eventually peak at $7.70 in mid-June of 2018.

However, it wasn’t just the shares of Sirius that Weschler was purchasing. He was also buying the Series A and Series C shares of the Liberty SiriusXM tracking stocks (LSXMA) (LSXMK). At the time, each of those tracking shares represented approximately 9.4 shares of Sirius and ~$0.33 of net debt. They were also selling at a discount of approximately 17% to the price of the underlying Sirius shares (net of the debt). And, again, it was Weschler that first made these purchases, and again Buffett followed. By the time the tracking stock buying had stopped in the Summer of 2017, Berkshire had acquired 31,090,985 of the Series C shares and 14,860,360 of the Series A shares.

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Berkshire would also sell a portion of its Sirius XM shares, reducing its stake to 137,915,729 by the middle of 2017. Berkshire would further trim its holdings of the Sirius shares to 136,275,729 shares, but had left its positions in the tracking stocks unchanged.

For those unfamiliar with the Liberty Sirius tracking stocks, these shares initially represented Liberty’s ownership of Sirius XM Holdings, along with some cash, debt and allocated expenses. The Liberty Sirius XM Group also had some income from the dividends paid by Sirius XM Holdings. It was fairly clean, and the ownership of Sirius XM Holdings has hovered in the high 60% to low 70% range. Recently, there have been changes at Liberty with certain assets and liabilities moving between various parts of Liberty, although this will be addressed more deeply in a future article.

More germane to this article, there are three classes of Liberty Sirius tracking stocks. While each share has the same economic interest in the underlying assets, the voting rights are very different. Each of the Series B shares carries 10 votes, while the Series A shares carry 1 vote and the Series C shares carry no votes. Liberty’s chairman, John Malone, owns almost all of the Series B shares, and by virtue of his ownership of these supervoting shares, he controls all of the decisions at Liberty Sirius, and thus controls the actions of Sirius XM Holdings. This control is one of the reasons that the shares have always traded at a discount to the underlying Sirius asset.

The non-voting Series C, or LSXMK shares, have typically – although not always – traded at a small discount to the Series A, or LSXMA shares. There are also twice as many Series C shares outstanding as Series A shares. I believe the latter point is the reason that Berkshire owns twice as many Series C shares as Series A shares. It enabled them to acquire a significant stake in Sirius without exceeding the 10% ownership of any class of the various stocks, a level which would have triggered a more immediate reporting of any activity.

Why bring this up now, more than three years after Berkshire’s buying and selling took place? Because earlier this month Berkshire reported its positions in Sirius and one of the two tracking stocks had declined.

  • The Series A tracker position was left unchanged.
  • The Series C tracker position was cut by 240,000 shares from 31,090,985 to 30,850,985, or down 0.77%.
  • The shares of Sirius XM Holdings were cut by 3,857,000 shares from 136,275,729 to 132,418,729, or down 2.83%.
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It would appear that Berkshire still sees more value in the tracking stocks than it does in owning Sirius directly. As of the close of the markets on Thursday, May 27th, the three positions had aggregate values of:

  • Liberty Sirius, Series C: 30,850,985 x $35.90 = $1.108 billion
  • Liberty Sirius, Series A: 14,860,360 x $35.88 = $0.533 billion
  • Sirius XM Holdings: 132,418,729 x $5.68 = $0.752 billion

And, the total value of the three positions is ~$2.4 billion, with the tracking stocks comprising two-thirds of the Berkshire investment. So, what can investors take away from the recent sales, especially sales that represented a relatively small percentage of the positions?

First, it suggests that Berkshire still finds more value in the trackers than directly owning Sirius XM Holdings stock. Second, I believe that the sale was by Weschler rather than Buffett. Earlier, I noted that the initial purchases were made by “Ted Weschler, one of two investment managers hired by Buffett.” The other manager hired was Todd Combs, both were hired a decade ago, and it was believed that the two would be competing to see who would succeed Buffett in managing Berkshire’s vast investment portfolio.

The relatively small size of the sale, and an observation that Buffett likes to take a very long-term horizon on his investments, leads me to believe the sale was by Weschler. I’m guessing that Weschler found another opportunity, an investment that he thought would perform better than Sirius XM Holdings.

There is another aspect to this particular story that may be even more significant. Following the end of Q1, Liberty made significant changes in the tracking stocks. According to the Liberty Media 10-Q:

On April 22, 2020, the Company’s board of directors approved the immediate reattribution of certain assets and liabilities between the Formula One Group (FWONA) (OTCQB:FWONB) and the Liberty SiriusXM Group (collectively, the “reattribution”).

The assets reattributed from the Formula One Group to the Liberty SiriusXM Group, valued at $2.8 billion, consisted of:

  • Liberty’s entire Live Nation stake, consisting of approximately 69.6 million shares of Live Nation common stock;
  • a newly-created Formula One Group intergroup interest, consisting of approximately 5.3 million notional shares of Liberty Formula One common stock, to cover exposure under Liberty’s 1.375% cash convertible senior notes due 2023 (the “Convertible Notes”);
  • a Convertible Note call spread;
  • the entire Liberty SiriusXM Group intergroup interest, consisting of approximately 1.9 million notional shares of Liberty SiriusXM common stock, thereby eliminating the Liberty SiriusXM Group intergroup interest; and
  • a portion, consisting of approximately 2.3 million notional shares of Liberty Braves common stock, of the Formula One Group’s intergroup interest in the Braves Group, to cover exposure under the Convertible Notes.

The reattributed liabilities, valued at $1.3 billion, consisted of:

  • the Convertible Notes;
  • Liberty’s 2.25% exchangeable senior debentures due 2048; and
  • Liberty’s margin loan secured by shares of Live Nation (“Live Nation Margin Loan”).

Similarly, $1.5 billion of net asset value has been reattributed from the Liberty SiriusXM Group to the Formula One Group, comprised of: …

Final Notes

The above information is only part of the “reattribution” process, but it begins to highlight the risk in owning a Liberty tracking stock compared to owning the common stock of Sirius XM Holdings. Earlier, I noted that the Liberty Sirius tracking stocks had been trading at a discount of ~17% to the value of the underlying Sirius shares at the time of the Berkshire purchases. The formula for calculating that discount had been fairly straightforward – multiply the number of shares of Sirius per tracker times the current price of the Sirius common stock, subtract the net debt per tracker and divide by the price of the tracker. It has now become far more complicated, and more risky to own the trackers.

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Live Nation (LYV) concerts, the Atlanta Braves (BATRA) (OTCQB:BATRB) baseball games and Formula One races have all been affected by COVID-19 closures and cancellations. And, in my opinion, their financials will suffer much more than those of the satellite radio subscription business of Sirius XM Holdings. This has resulted in the tracking shares trading at a discount much greater than the 17% mentioned earlier.

I am currently long Sirius XM Holdings, have no intention of buying the Liberty tracking stocks and own a very small position (58 shares) in Live Nation. I did not “purchase” Live Nation and would not be able to tell you in what convoluted manner I acquired the shares other than that it was likely I received them as a result of a merger and/or spin-off of another small holding.

Disclosure: I am/we are long LYV, SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have small long term positions in both LYV and SIRI. I also have a relatively large trading position in SIRI – half of which I may sell at any time and the other half where I am looking at writing a near term covered call with a strike price of $6. .