Introducing the Unlikely Pairing of Warren Buffett and John Mayer at Sirius XM

Warren Buffett and John Mayer may seem like an unlikely duo, but they have both found common ground in their investment in Sirius XM Holdings Inc. Buffett’s interest in the satellite-radio company comes through Berkshire Hathaway Inc.’s position in Liberty Media Corp.’s tracking stocks for Sirius XM. Berkshire Hathaway has invested $267.2 million in the Liberty trackers this year, seeing potential in the upcoming consolidation of the stocks into Sirius XM shares.

On the other hand, Mayer is investing his time in Sirius XM by curating a new channel called “Life with John Mayer” which features his music and commentary. Despite being able to sell out large venues, Mayer sees value in contributing to Sirius XM’s offerings.

Buffett’s approach to investing in Sirius XM has an intriguing twist. The conversion of Liberty tracking stocks into Sirius XM shares is expected to happen by the end of August. With a conversion rate of 8.4 Sirius XM shares for each Liberty share, there is potential for what Buffett calls “free money.” By multiplying the Sirius XM share price by the conversion rate, investors can see a significant increase in value. However, there is always a risk involved, as the spread could close through declines in Sirius XM shares.

Chris Marangi, co-chief investment officer of value investing at Gabelli Funds, sees owning the Liberty tracking stocks as a way to gain cheaper access to the Sirius XM business. The enterprise value to EBITDA ratio drops from around 9.0 to 7.0 if investors get access to Sirius XM shares through the Liberty tracking stocks.

Despite challenges such as a slight decline in revenue and subscriber base, Sirius XM has potential avenues for growth. One such avenue is through Mayer’s involvement in drawing in younger listeners. Sirius XM aims to change its lineup to appeal to a younger demographic, and Mayer’s star power can help achieve that goal. Additionally, the company’s new app improves access to content and enhances engagement. Rising new-car sales also present growth potential, as most new cars come with Sirius XM radio and a free trial period.

Investors can also benefit from Sirius XM’s prodigious cash flow. The company produced $1.2 billion in cash flow last year and plans to use it to enhance shareholder value through dividends and share buybacks. Cost cuts and a large subscriber base contribute to the company’s strong cash flow.

Overall, both Buffett and Mayer see potential in Sirius XM’s future. While there are challenges, the company has strategies in place to drive growth and maintain its strong financial position. Investors may want to take note of this unlikely pairing and consider the opportunities presented by Sirius XM.