Yesterday, the Federal Communications Commission (FCC) granted Liberty Media's (NASDAQ:LMCA) application for permission to go to de jure control of Sirius XM Radio (NASDAQ:SIRI). In granting the request, the FCC noted that Alexander Bergmann was the only individual to file comments in response to the Application and that he responded to Liberty's filing that challenged his filing on a number of grounds, including Bergmann's contention that Liberty should be required to go to 80% ownership and that his filing was procedurally deficient.
Regardless of whether or not Bergmann's filings met the submission guidelines, the FCC stated "that Mr. Bergmann's comments do not warrant further action," noting:
...we conclude that Mr. Bergmann's filings do not contain specific allegations of fact sufficient to show that a grant of the application would be prima facie inconsistent with the public interest. Moreover, Mr. Bergmann's arguments concerning the standard for determining control do not warrant departure from the well-established Commission approach to determining de jure control based on stock ownership. The Commission has repeatedly held that 50 percent ownership of voting stock of a corporate entity is sufficient to confer de jure control on the majority shareholder.
In its decision on Liberty's application, the FCC discussed the effect of the proposed transaction on the competitive landscape, and noted that there were no "horizontal competition issues" since Liberty provided no "media distribution services that directly compete with the satellite radio services offered by Sirius." In discussing vertical competition issues, the FCC noted the potential conflict with Liberty's ownership of the Atlanta Braves franchise, but decided that
Liberty Media is unlikely to disadvantage terrestrial radio programmers by not providing or delaying Atlanta Braves programming to them given the order of magnitude of programming fees and franchise value at risk that would far outweigh profits that would flow to Liberty Media from increased Sirius subscriptions.
There was a brief discussion about how the FCC employs "a balancing test weighing any potential public interest harms of the proposed transaction against any potential public interest benefits." The FCC stated that the burden of proof was on Liberty, and that the FCC had to decide if the transaction would meet the broad objectives of the Communications act, including:
- preserve and enhance competition in relevant markets
- accelerate private sector deployment of advanced services
- ensure a diversity of license holdings
- manage spectrum in the public interest
- affect the quality of communications services
- result in the provision of new or additional services to consumers
The FCC noted that Liberty offered no evidence of specific benefits that would result from the transaction and instead relied on "upon the general economic benefits accruing from facilitating investment in FCC licensees and permitting investors to realize the full value of their investments."
Since the FCC found no "substantial public interest harms with this proposed transaction," it decided "the general benefits that are likely to result from the transfer of control provide a sufficient basis to conclude that the transaction will serve the public interest."
What's Next For Liberty Media?
Shortly after the FCC issued its ruling, Liberty issued a press release stating it "expects to complete the transfer of control of SiriusXM within 60 days." To accomplish this, Liberty simply needs to convert the rest of its preferred shares to common shares and purchase enough additional common shares to go to a majority. At the current time, and based on the latest relevant Form 4, 13D and 8k reports filed by Liberty and Sirius XM, it appears that Liberty needs to purchase less than 16 million shares, or less than 13.1 million shares if it chooses to convert its holding of Sirius XM 7% Exchangeable Notes. In addition, Liberty may need to buy several million additional shares to cover the potential exercise of options by key Sirius XM executives.
The average daily trading volume of Sirius XM shares over the past three months has been nearly 75 million shares. It seems unlikely that the additional purchases required by Liberty to go to majority would have any noticeable impact on the share price of Sirius XM. I suspect that once Liberty is at a simple majority and has satisfied its commitment to the FCC, there would be little reason for Liberty to use its own cash for additional common stock purchases. It could simply allow the recently announced Sirius XM share buyback to eventually increase its majority position to 51%, or 54%, or whatever level it felt comfortable with.
In Liberty's original applications for de facto control, Liberty noted that because of the lack of shareholder participation in the elections of Directors to the Sirius XM board, the 2.6 billion common shares underlying its preferred shares (at that time) were far in excess of the number of shares that were actually voted for directors in 2010 and 2011, when only 23% (less than 1 billion common shares) and 33% (just over 1.3 billion common shares) of the common shares were voted. Does this mean that Liberty would allow its ownership percentage to go below 50%? I doubt that it would allow it to occur for any significant period of time.
As part of that buyback announcement, Sirius XM stated:
Liberty Media Corporation, the beneficial owner of approximately 49.8% of the company's stock, has indicated that it will participate in the company's share repurchases on a pro rata basis so that its relative ownership interest will not be affected by the program.
This agreement was probably made to "protect" the Sirius XM board from being accused of facilitating a takeover by Liberty. However, once Liberty puts itself at majority, that concern should be greatly diminished. Liberty, as the new owner of Sirius XM, would simply have to amend whatever agreement it made with Sirius XM and temporarily delay its participation in the buyback to let its ownership increase enough to account for the incremental shares likely to be issued for the 7% Notes, employee stock options or the Sirius XM savings plan.
If Liberty doesn't need more than 50% to control the board, why not let the ownership remain below 50%? Liberty CEO Maffei made this statement last year:
... you buy up to 51%, you get yourself into a position of hard control, you then can direct how their cash can be deployed and how you then have a systematic shrink there which increases your ownership percent at the Liberty level.
There are also accounting treatments that change once the level is above 50%. And, if Liberty's eventual desire is to spin out its stake in Sirius XM to Liberty shareholders in a tax-friendly Reverse Morris Trust (or RMT) transaction, the Liberty shareholders must own a majority of the "new" Sirius XM entity, or "new-Sirius." There are different paths that Liberty can take to ensure that Liberty shareholders own a majority of new-Sirius. The most obvious would be for Liberty to simply own enough of the common stock in Sirius XM at the time of the RMT to demonstrate a majority. However, Liberty could also negotiate a premium for Liberty shareholders, or include other Liberty assets in the transaction, that would result in Liberty shareholders owning a majority of new-Sirius.
I suspect that Liberty will be using as little of its own cash to buy the number of additional shares to get to a majority and stay there, preferring to let the Sirius XM share buyback absorb the additional new shares that will come into the market. This would indicate that there could be less immediate buying pressure pushing the share prices higher.
Regardless, Sirius XM shareholders continue to receive news that removes much of the uncertainty that has surrounded the company for the past year. Within the past few months the CRB announced a decision about the company's music royalty rates, the company finally announced the start of a share buyback program, the status of former CEO Mel Karmazin was announced and now the issue of whether or not the FCC would grant Liberty's application for control of Sirius XM has been resolved.
Within the next 60 days, shareholders will learn how many shares Liberty will purchase as well as 2012 results and 2013 guidance and even more uncertainty will be removed. Investors looking for some additional insight should plan on listening to Maffei's presentation Tuesday evening at the Citi Global Internet, Media and Telecommunications Conference as well as the one by Sirius XM's CFO David Frear the following day.
Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position. I also have a variety of other covered call positions. I may initiate (or close) a buy stock/sell option position in SIRI discussed in a recent article at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so. I have no position in LMCA.