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Opinion Meet Sirius XM’s new odd couple: Warren Buffett and John Mayer

Berkshire Hathaway and other Liberty Media shareholders are getting a ‘free money’ play on the satellite-radio company Warren Buffett, the famed investor, and John Mayer, the popular songwriter and guitarist, would seem not to have much in common. But one thing they both share is a big bet on Sirius XM Holdings Inc. SIRI, -3.39%, the satellite-radio company. 

Buffett’s interest comes via Berkshire Hathaway Inc.’s BRK.A, -0.42% BRK.B, -0.56% position in Liberty Media Corp.’s Series A LSXMA, -1.44% and Series C LSXMK, -1.45% tracking stocks for Sirius XM, which represent the value of a portion of Sirius XM’s business. Berkshire Hathaway has dropped $267.2 million on the Liberty trackers so far this year, at an average price of $30.28.

Mayer, meanwhile, is investing his time in Sirius XM. He can sell out large venues whenever he wants, but he also curates a new Sirius XM channel that features his music and commentary, called “Life with John Mayer.”

‘Free money’ Buffett’s approach has an intriguing twist. Later this year, various Liberty Media tracking stocks will be consolidated into Sirius XM shares. The conversion rate will be 8.4 Sirius XM shares for each Liberty share. 

Some simple math suggests there’s potential “free money” in the mix. The two Liberty share classes recently traded for about $29. Multiply the Sirius XM share price of $4.43 by the 8.4 share-conversion rate and you get $37.21. In short, owning the Liberty tracking stocks amounts to an $8-per-share gift as things now stand. The conversion is slated to happen by the end of August. 

One tactic might be to buy Liberty Media shares, take the “free money” assuming the conversion gap holds, then exit the position. “The spread has to close at some point between now and the end of August,” says Chris Marangi, co-chief investment officer of value investing at Gabelli Funds. But it also might be worth keeping the Sirius XM stock. 

Of course, a risk is that the spread closes via declines in Sirius XM shares. It would still be tough to lose all the “free money.” If you buy a Liberty tracking stock at $29, Sirius XM would have to fall to $3.45 ($29 divided by 8.4) from the recent Sirius stock price of $4.43 for you to lose all the potential share-conversion upside, notes FBN Securities analyst Robert Routh. He thinks such a decline is unlikely. In fact, he’s more bullish on Sirius XM than consensus, and he makes a plausible case (more below). 

Marangi looks at owning the Liberty tracking stocks as a way to get cheaper access to the Sirius XM business. Sirius XM trades at an enterprise value to Ebitda of around 9.0. That falls to 7.0 if you get access to Sirius XM shares via the Liberty tracking stocks, which Gabelli Funds owns. Berkshire Hathaway may be using the same logic. 

Like Routh, Marangi is bullish on Sirius XM’s prospects over a multiyear timeframe. Besides the free-money angle, Sirius XM has many of the qualities that Berkshire is known to appreciate — especially underappreciated growth and lots of cash flow. 

Surprise growth ahead? Sirius XM has challenges. Revenue slipped to $8.95 billion last year from $9 billion in 2022. The company’s 34 million subscriber base was also down slightly. The future doesn’t necessarily look much brighter. Sirius XM’s guidance calls for another down year in sales in 2024, expected to come in at $8.75 billion. Morningstar analyst Ali Mogharabi projects 1% annual revenue growth for Sirius XM and its streaming platform Pandora over the next five years.