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Barclays analyst James Ratcliffe upped his rating on Sirius XM (NASDAQ:SIRI) to Equal Weight from Underweight and also bumped up the satellite radio’s largest shareholder, Liberty Media (NASDAQ:LMCA), from Equal Weight to Overweight. He also raised his price target on Sirius to $2.25 from $2 and on Liberty to $108 from $98. The analyst said improving U.S. auto sales had prompted him to take a more positive view on Sirius, which sells its units to makers of vehicles.
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“We continue to find the long LMCA/short SIRI trade attractive (even though the spread has been reduced), but now also view LMCA attractive as a simple long (and the best way to get exposure to SIRI shares), due to our more positive view on SIRI,” Ratcliffe wrote in a note to investors.
Ratcliffe was also of opinion that the mostly likely mutually agreeable outcome of the two companies’ feud over control of the satellite radio would be a distribution of Liberty’s stake in Sirius to the former’s shareholders.
“We believe both LMCA and SIRI management would like to complete a distribution of SIRI shares to Liberty shareholders, due to the tax advantages for Liberty and the removal of a controlling/interfering shareholder from the perspective of SIRI management,” he wrote.
“The core stumbling block to completing [a Reverse Morris Trust] is price, but we continue to believe an announcement or at least a defined path to an RMT will be given by the end of the year. We also believe Liberty maintains the upper hand in negotiations because it can assume control at time, given its existing 46 percent ownership stake. We would expect the resolution of an RMT to lead to substantial buybacks of SIRI stock, which could be as high as $1 billion/year, assuming current expectations for [free cash flow].”
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