What's Next for Sirius XM?

Liberty Media (NAS: LMCA) continues to inch closer to grabbing a majority stake in Sirius XM Radio (NAS: SIRI) .

Earlier this week Liberty Media revealed that it had converted nearly half of its 40% preferred share stake into actual stock. The move doesn't change the eclectic media conglomerate's effective stake in the satellite radio giant. That's still just shy of 50%. However, Liberty Media wouldn't be converting a sizable chunk of the preferred shares that it received when it bailed Sirius XM out of near bankruptcy three years ago if it wasn't sure that it would be able to get regulatory blessing to take majority control of Sirius XM.

It's going to happen, and probably soon.

What happens next?

Weak signal
Gabelli & Co. downgraded Sirius XM to sell last week. Analyst Brett Harriss understands why the stock has rallied this year. The satellite radio provider has kicked off the year with strong back-to-back quarters. Guidance continues to be bumped higher. However, there has also been the significant presence of Liberty Media as a buyer. Since the John Malone's springtime shopping spree began, Liberty Media has gone from owning a 40% preferred share stake in the company to an effective 49.5% position in the company.

Liberty Media isn't just buying. It's holding, since it clearly will need to top 50% ownership after being rebuffed on its attempt earlier this year to gain de factor control.

Harriss is naturally worried about what will happen when Liberty Media stops buying -- and Liberty shareholders begin selling the Sirius XM stock that they receive in a Reverse Morris Trust.

The party doesn't necessarily have to end there. Even the short-term bearish analyst believes that Liberty's control will result in a leveraged recapitalization of Sirius XM that will result in share repurchases or a special dividend. Stock buybacks have worked well for Liberty Media in the past, Harriss points out, when it amassed sizable positions in Discovery Communications and DIRECTV. Is Sirius XM the next winner?

However, the Gabelli & Co. analyst just feels that the stock has outrun its fundamentals. Harriss thinks that the Sirius XM was fairly valued last week at 19 times this year's expected EBITDA and 15 times next year's target.

Give 'em Mel
Shares of Sirius XM could also take a hit if CEO Mel Karmazin steps down.

His multi-year contract to run the company ends this year, and Karmazin recently hinted that Liberty Media may not want him around.

It's true that Sirius shares are lower now than they were when he took over, but Karmazin orchestrated the merger between Sirius and XM that resulted in today's profitable and growing company. As bad as things got early on in his tenure, Sirius XM has been one of the market's hottest stocks since bottoming out three years ago.

There are positive catalysts, too
Let's not pitch a tent and camp out in the negatives. There are plenty of positive catalysts that may play out in the coming weeks and months.

Car sales continue to be strong, and that's a fair indicator that Sirius XM will continue to deliver strong results paired up with higher guidance.

Sirius XM also is on track to beef up its streaming product when it takes on Pandora with a personalized radio platform of its own by year's end.

Yes, Sirius XM is now at the mercy of what Liberty Media does. The next few weeks will be volatile. However, a growing service with improving margins will eventually overcome the near-term swings to deliver long-term gains.

Running of the bulls
I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.

I recently put out a premium report on Sirius XM Radio, detailing the challenges and opportunities that await investors that are both long and short the dynamic media giant. A year of updates is also included with the report. Click here to check it out now.

The article What's Next for Sirius XM? originally appeared on Fool.com.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Liberty Media. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.