Liberty's Sirius investment in 2009 / parallels to Peloton today
On the heels of the bonkers Bills / Chiefs game Sunday, there was a lot of discussion “was that the best football game ever?” It’s a completely subjective question that’s prone to a lot of recency bias. And, even ignoring the recency bias, there are lots of factors that might make one person prefer a different game. Bills / Chiefs was tight the whole time; maybe some people think the best game ever would involve a massive comeback (a la the Pats coming back from 28-3 in the Super Bowl a few years ago). Some people might weigh higher stakes (a Super Bowl game over a divisional round) or a rivalry with a little more history (like 49ers / Cowboys). Heck, some people might prefer an old school, slog it out, 6-3 bruiser for the best game ever (I’d consider those people psychopaths, but to each their own!).
No doubt Bills / Chiefs was great, but we’ll never be able to say if it was the best game of all time or not.
Similarly, it’s tough to say what the best investment of all time was. There’s just so many things to chose from. Ackman buying protection right before COVID blew up was a masterstroke, but how do you compare that investment to someone who invested into Facebook or Google’s first round?
So we’ll never know what the best investment of all time was…. but I’d put Liberty’s distressed investment into SiriusXM in 2009 on the short list of potential best investments. It was a pretty complicated investment (you can see the terms on p. F-22 of SIRI’s 2010 10-k), so I could be missing a piece here or there, but the basics of the investment were Liberty lent Sirius ~$250m in Feb. 2009. That loan carried a 15% interest rate, and (here’s the real kicker) Sirius gave Liberty preferred stock that was convertible into ~40% of Sirius’s equity (~2.6B shares) as an enticement (i.e. for free) to make the loan.
Sirius repaid the Liberty loan in August 2009, meaning that ~6 months later Liberty had basically a 0 cost basis (or negative, if you include the interest) on their 40% ownership of Sirius. 2.6B shares of Sirius today are worth ~$16B (plus, the company has paid some dividends in the mean time). There’s been some movement since then (again, SIRI’s paid out some dividends, and Liberty has bought and sold some shares over the years), so Liberty’s returns are a bit more complicated… but pretty much no matter how you cut it if you loan someone $250m and get paid back in a few months plus have an equity kicker that’s worth >$15B 13 years later, that investment probably qualifies for the investing hall of fame.
Why do I mention all of this? Well, about a month ago, I went on a podcast with my buddy Byrne Hobart of The Diff to talk Liberty, and we both mentioned how we could see Liberty getting involved with Peloton at some point. Since that podcast, things haven’t gone great for Peloton: the stock remains in free fall as it appears they’ve lost the handle on their operations, and an activist is calling for the board to fire the CEO / founder. Every time I see another negative headline for Peloton, I wake up wondering: how long till Liberty makes an investment into Peloton?
I know a lot of people will think Liberty investing into Peloton is unlikely (and they’re right; calling any specific corporate investment is always a long shot!). Bears think Peloton faces a rocky future due to an onslaught of competition from players like Apple and Google, slowing growth, substitutivity with “free” options (like running outside), and a variety of other issues (including churn that is masked by people amortizing their bikes but that will skyrocket as their base ages / promos run off).
Guess what? You could have said the exact same things (down to the Apple / Google competition) about Sirius back in 2009. Here’s a FT article discussing Liberty’s Sirius investment that notes “Sirius’s niche, subscriber-based business model looks increasingly weak” and that online music services and wireless technology pose a long term threat, as well as churn issues as the promo periods expire. That sounds an awful lot like the risk factors for Peloton today!
Beyond similar risk factors, there’s a lot of other similarities to Peloton and Sirius. Both are subscription businesses that people use near daily; both involve a hardware component that is expensive upfront but is superior to a variety of free options because it works (again, a car has both a free radio option and the ability to connect to your phone; despite that easy competition, SIRI continues to grow their sub base). Both products are leaps and bounds larger than their biggest competitors, which should give them some interesting scale benefits in a variety of ways (an important one is paying for content; SIRI can afford Howard Stern and the NFL audio streaming deals. PTON’s scale lets them do integrations and partnerships no competitor could dream of). Both even have a music angle (and have their margins crimped by the royalties they pay for music!).
Calling a specific investment or merger is always difficult. But I know Liberty is very aware of Peloton (I believe the whole Liberty team would hit a Peloton class before their investor day in the pre-COVID times), and Peloton today rhymes with a lot of the investments that Liberty has had big success with in the past (on top of the Sirius parallels, you could see some similarities to Liberty’s investment in F1. Both are brands beloved by their users / fans but that had certainly had some significant operational issues over the years).
Why mention this now? Well, I love Peloton, and while I have no current position in the stock I’m just fascinated by everything going on there. And the more I look at the company, the more I think Liberty getting involved could make sense for all parties involved.
Today marks the one year anniversary of Liberty’s SPAC (LMACA) IPOing. That SPAC has $500m in cash plus a forward agreement from Liberty for another $250m; it’ll expire in a year. The SPAC was designed to take a company public that could benefit from Liberty’s ownership / partnership. I know Liberty has been frustrated by the high prices in the private markets over the past year; perhaps the current growth wipeout will help them find a target. If they can’t, it’s a long shot (the SPAC is designed to take a company public), but I wonder if the SPAC could be used as a part of any Liberty / Peloton investment.
I’ll acknowledge this post is more a thought bubble than a seriously thought out proposition; I know there are issues with a SPAC investing in a public company, and there are big limitations in a comparison of Peloton today and SIRI ~15 years ago. So please, don’t miss the forest (the overall line of thinking) for the tress (getting bogged down in specific reasons a hypothetical investment in Peloton today isn’t the exact same as an investment in SIRI 15 years ago).
PS- I had linked it in my post over the weekend, but worth re-highlighting: my friends at Daloopa have a free Peloton model if you’re interested in brushing up on them; I’ll disclose I’m friendly with the team but worth checking out if you build out lots of models!