Warren Buffett Just Made a Huge Bet on a Hidden Stock.

Warren Buffett has very sneakily just made a rather sizable bet on a new stock, and it's not your typical Buffett-style investment, like what he did last year with Activision Blizzard stock. Buffett has just placed another big Arbitrage bet that a certain corporate merger will go through, but this one seems to be much more likely for roughly the same potential upside. The stock I'm referring to is Liberty Media, the owners of Formula 1, Sirius XM, Live Nation, and more. So in this video, I'm going to explain exactly how Warren Buffett seems to be exploiting a bit of a stock market loophole to potentially make himself around 25% in a rather short space of time.

It all starts here with an announcement from Sirius XM Holdings and Liberty Media from late last year. Now I'm going to read through the announcement first, and then we'll explain it all afterwards, so definitely do not be discouraged if you're a little bit confused by what's going on here and how Buffett is going to make his money. We will most definitely go through that in a second.

But anyway, the announcement said, "Liberty Media and Sirius XM Holdings Inc., the leading audio entertainment company in North America, today announced that they have entered into definitive agreements whereby Liberty Media's Liberty Sirius XM Tracking Stock Group, collectively LXM, will be combined with Sirius XM to create a new public company called New Sirius XM, which will continue to operate under the Sirius XM name and brand. New Sirius XM will have a single outstanding series of common stock and is expected to continue to be traded on the NASDAQ Global Select Market under the ticker symbol SIRI."

So quite simply, Sirius XM and the Sirius XM tracking stocks of Liberty Media are going to merge, and in that process, Warren Buffett sees a window of opportunity to make some free money. So what's Buffett doing, and how is he set to cash in on this relatively simple merger? Well, to understand this merger, we first have to understand the players, and this is where it can get a little bit confusing, so definitely pay attention through the next few minutes.

Liberty Media is the stock that Buffett is buying, right? Liberty Media is this big mass media company in the U.S. They actually have a few different business segments; they own 83% of Sirius XM, which is, of course, an American Broadcasting Corporation that provides numerous satellite radio and online radio stations, as well as the music streaming service Pandora. Now beyond that, in 2017, Liberty also purchased Formula 1 and very recently Moto GP as well. So they also have a motorsport arm of their business, which is called the Formula 1 Group, that also includes an ownership stake in F1 Arcade, as well as Mya Shank Racing, and complete ownership of Quint Events. Then finally, they also have a live entertainment arm of their business, which includes a 30% stake in Live Nation, which is the music concert company that also owns Ticket Master, as well as small stakes in some other businesses such as Drone Racing League, Tastemade, Overtime Sports, and Crony Arena Company that owns Ball Arena in Denver.

So there are many businesses and investments under John Malone's Liberty Media, and they sort all these wholly owned businesses and investments into those three segments. Now, in my opinion, that’s hard enough to understand already, but not for Liberty Media. You'd think all these businesses would just fall under Liberty Media stock, one ticker that represents all these various businesses, kind of like how buying Berkshire Hathaway shares represents lots of different businesses. Well, you would be wrong because there are, in fact, nine different shares you could potentially buy to own parts of Liberty Media. The reason for that is because of their tracking stock system, where instead of offering one simple Liberty Media stock, they instead offer three classes of shares for each of the three business segments they have.

So if you want some Formula 1 but not Sirius XM, you can do that. If you want Sirius XM but no motorsport or live entertainment businesses, you can do that. But anyway, long story short, Liberty’s Live Group has Class A and C shares, their Formula 1 Group has A and C shares, and then their Sirius XM Group also has A, B, and C shares.

Now, we're going to zoom in to just the Sirius XM Group’s three classes of shares. The A shares each have one vote, the B shares have ten votes—they’re owned by John Malone—and then the C shares do not get a vote. Now here’s the thing: collectively, this Sirius XM Group holds 83% of the shares of Sirius XM Holdings, which is a publicly traded company listed on the NASDAQ under the ticker symbol SIRI.

This brings us back to that announcement before last year. Sirius XM Holdings, the public company, and Liberty Media, who own 83% of the Sirius XM shares with their tracking stocks, get together and they say, "This is way too complicated, let's merge Liberty's Sirius XM arm and Sirius XM Holdings to create one brand new definitive Sirius XM stock." So as I said earlier, they’re going to create this brand new company by merging Siri as well as these three classes of Liberty shares.

Now this presents an interesting situation because if we look at the market cap of Sirius XM Holdings, the public company, right now it’s valued at around $13.41 billion. But by looking at the three different classes of Liberty Sirius XM shares, then multiplying the number of shares outstanding in each class by their respective stock price and then adding those sums together, you can see that Liberty is valuing their 83% stake at $8.91 billion total, or in other words, valuing Sirius XM Holdings at a total market cap of $10.7 billion. Sirius XM's market cap says $13.41 billion; Liberty shareholders value it at $10.7 billion.

So there’s this discrepancy, right? A discrepancy between what Liberty shareholders value Sirius XM at and what Sirius XM's market cap actually is. The Liberty shares are actually a good bit cheaper. So what Warren Buffett has done is he’s gone ahead and purchased a lot of the Liberty Sirius XM A and C shares, hoping that when the share classes merge with Sirius XM Holdings to create this new stock, that he will end up with new Sirius XM shares that are traded on the public markets for a bit more than what he bought his Liberty Sirius XM shares for. It’s pretty smart.

I listened to Heish explaining this recently on our podcast. Essentially, if the merger is approved, the gap in value will close because there will be two shares that are listed at kind of two different prices that are going to be merged into one price. So the gap is going to close, and so people who want to trade this kind of thing will often do this specific case— you might buy the Liberty shares and then short-sell the Sirius XM shares to benefit from that gap, which is going to close. That’s exactly what Warren Buffett has done. We don’t know whether he’s going in both directions, AKA shorting Sirius XM as well as buying Liberty shares, but what we do know is he’s loading up on Liberty shares, and we know this through the power of the Form 4 filing.

So a Form 4 is similar-ish to a 13F. You know, with a 13F, at the end of each quarter, the super investors of the United States have to disclose what’s in their portfolios, right? Well, a Form 4 is a similar concept, but it's a form that details changes in beneficial ownership of a company. Essentially, it’s a disclosure that has to be made if an investor who owns more than 10% of a company decides to buy or sell shares in the business. So Warren Buffett owns more than 10% of Liberty Sirius XM shares, so whenever he buys or sells some more, within two days he has to let the SEC know what he’s done.

If you look at the history of Warren Buffett’s Form 4 filings since January, they straight up tell you that he’s been buying a lot of Liberty stock, particularly in March. This article from Market Watch summarizes the situation quite well. It notes, "In Form 4 filings with the US Securities and Exchange Commission over the past week, that being the last week of March, Buffett’s investment vehicle Berkshire Hathaway disclosed that it paid about $27.94 million to buy 8.9 million Liberty Sirius XM Series C shares at a weighted average price of $29.6. Berkshire also disclosed paying $110.32 million to buy 3.8 million shares of Liberty Series XM Series A shares at an average price of $29."

In total, Berkshire bought 12.68%, but here’s the interesting result from all of that buying: “Buffett now owns about 30% of Liberty Sirius XM’s outstanding shares.” So Buffett now owns 30% of Liberty’s Sirius XM shares total, which is 83% of all Sirius XM shares. So once you add the new buyers to the 43.2 million C shares and the 20.2 million A shares that Berkshire already owned coming into Q1, all of a sudden Buffett has a rough $2.7 billion position in Sirius XM through Liberty Media, which would make it the 10th largest holding in his portfolio, sitting between D and Citigroup.

So while it seems on face value that this is just a little fun side bet, once you actually add it all together, it’s reasonably substantial. If say the new stock that’s set to be created does take on a market cap closer to Sirius XM Holdings, as opposed to the $10.7 billion that the Liberty shares value it at, well Buffett stands to make up to around 25% on his money in a short space of time.

So that's the sneaky way that Buffett is gaming the system by buying Sirius XM shares at a discount through Liberty Media’s Sirius XM tracking stock and then hoping that when they merge, the new shares will trade closer to the share price of Sirius XM Holdings as opposed to the tracking stock. The only question is, however, will this merger actually go through for Buffett? Remember, Buffett also made a risky Arbitrage bet on Activision Blizzard last year, thinking that it would be a cinch, only for that bet to almost fall apart as the FTC stepped in to try and block the acquisition.

Now, that was a rather stressful time for Activision arbitragers. However, I think this time around it should be much, much simpler—touch wood. The reason I say that is, at the end of the day, this is not an acquisition; it’s simply a merger. To go one step further, it’s a merger between fundamentally the same business. One holder of Sirius XM shares is merging with another holder of Sirius XM shares. It should, again—touch wood—be a very straightforward merger of the two.

The only thing that remains to be seen is what the market prices this new whole Sirius XM company at and thus how much of that potential 25% upside will Warren Buffett get to realize. So that’s what’s going on with Buffett’s latest moves. The only other thing I did just want to mention, as I always do, is that with Berkshire Hathaway, remember there are technically three asset managers that this could have potentially been. There’s Buffett, and there’s Todd Combs, and there’s Ted Weschler.

Personally, I probably think this was Buffett considering the size of the position and his willingness to participate in risky arbitrage opportunities, but some people are currently saying that this could have been Ted Weschler as well, which we can’t actually rule out. It doesn’t change the information or the point of this video; it’s just something I thought that I should point out. It doesn’t make the investment any less interesting or valid. In fact, it seems as though another very notable value investor in Seth Klarman is also coming along for the arbitrage ride, as he too holds a lot of A and C Class Liberty Sirius shares.

So I thought I would point that out. But with that said, guys, thanks very much for watching. If you wanted to learn how to go through the full Warren Buffett strategy, you know, from analyzing, evaluating the management team, valuing the shares, reading financial statements, definitely check out the Introduction to Stock Analysis over on New Money Education. That is a full 6-hourish course that I’ve put together over on New Money Education that you can now go and have a look at.

You can also use the code SAVE50 at checkout to get a $50 discount, which is really cool. Or if you wanted to get started over there for free, you can also do that with our free investing masterclass. But with that said, guys, thanks very much for watching. Definitely leave a like on the video if you did enjoy it, subscribe to the channel if you have not done so already, and with that said, I'll see you guys in the next. [Music] [Music] one