Sirius Moves Closer to Being Bought (Update 2)

(Updated to add tweet about net operating loss and analysis in the eighth and ninth paragraphs.)

NEW YORK (TheStreet) -- Sirius has been a battleground stock seemingly forever, but as the company has improved its cash position, the rumblings that it could be acquired grow ever louder.

John Malone and Liberty Media could be the ones to do it, according to a Citigroup analyst.

Analyst Jason Bazinet says Liberty may potentially double its stake to 80%. Bazinet believes this could create an additional $930 million in value by tapping into Sirius' significant tax assets. Bazinet rates Sirius "buy" with a $2.50 price target and Liberty Media "neutral" with a $94 target.

This comes as several major hedge funds reduced their stakes in Sirius during the fourth quarter. Funds like SAC Capital Advisors, JAT Capital and George Soros reduced or cut their stakes.

Sirius is now free-cash-flow positive and just recently raised monthly subscription prices for the first time in the company's history.

Barrington Research analyst James Gross calls Sirius' free-cash-flow growth "impressive," saying it "should provide a meaningful catalyst for share-price gains. ...," Gross wrote in his Feb. 13 research note. He rates shares "outperform" with a $3 price target.

Bazinet says an 80% ownership stake by Liberty could cause free cash flow to "ramp significantly over the next four years," as well as "pave the way for Sirius to use its cash flow to retire the remaining 20% of public float over next four years."

Shares of Sirius are up 24.2% this year, while shares of Liberty Media have risen 15.4%.

The quixotic John Malone-chaired cable and media conglomerate has stakes not only in Sirius, but also in Barnes & Noble and Live Nation , and has never been shy about tax-advantaged acquisitions. Sirius is certainly that, as it has net operating losses (NOL) and will not have to pay taxes for the foreseeable future.

StockGuy82 on Stock Twits tweeted the NOL would be "very advantageous to prospective buyers."

Liberty Media has historically spun out its investments, having done so with Discovery Communications , DirectTV and others, but that may not be the case this time.

Malone's style prompted Warren Buffett-run Berkshire Hathaway to recently acquire a stake in Liberty Media. Several hedge funds, including Tiger Global Management, Och Ziff Capital Management and David Einhorn-run Greenlight Capital Management also have positions.

(See the rest of Warren Buffett's portfolio.)

Bazinet writes in his research note that Liberty Media has access to $6.5 billion in liquidity from three sources: "1) $3.85 billion from Liberty Media cash on hand, existing Sirius debt, existing lines of credit and FCF in 2012; 2) $1.4 billion from Sirius cash on hand and FCF in 2012; and 3) $1.25 billion in cash from Liberty Ventures." Purchasing an 80% stake of Sirius at $2.50 per share would cost $6.36 billion, so Liberty Media has the means to do it.

Bazinet is not the only analyst who says a merger or takeover is likely. In a Feb. 9 report, Pivotal Research Group analyst Jeffrey Wlodarczak increased his price target for Liberty Media to $107 a share, driven by an increase in the value of Sirius XM Radio.

"We continue to believe Liberty inevitably increases its stake in SIRI above 50% prior to an inevitable merger," wrote Wlodarczak, who noted that by clawing back Starz, the company now has up to $9 billion that it can use for share buybacks or acquisitions of investments like Sirius and LiveNation.

The signs for a potential Sirius merger are there, with more than one analyst forecasting an inevitable merger. Whether it happens is in Malone's hands, but the groundwork has been laid.

Shares of Sirius are higher today, up 1.35% to $2.25.

For more on M&A, see 5 deal ready stocks loved by hedge funds portfolio's.

-- Written by Chris Ciaccia and Antoine Gara in New York

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