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Sirius XM (NASDAQ:SIRI) was expected to do a tender offer after the change of control to Liberty Media (NASDAQ:LMCA). The expected tender offer was filed on Friday after the close.

The essential details are that holders of the 7% Exchangeable Senior Subordinated Notes Due 2014 have the ability to get certain premiums if a change of control happened. When Liberty and Sirius XM annonced that a change in control had indeed taken place, the tender offer was fully expected.

The tender offer allows bond holders a few choices:

Assuming you hold Notes in an aggregate principal amount of $1,000.00, you may choose to:

  

Surrender Notes for cash : If you exercise the Purchase Right prior to the Expiration Date, you will receive $1,000.00 in cash per Note plus accrued but unpaid interest to, but excluding, the Purchase Date.

  

Exchange Notes for Common Stock : If you exercise your exchange rights for Common Stock during the Fundamental Change Exchange Period, you will receive 581.3112 shares of Common Stock per Note. On January 31, 2013, the last reported sales price of the Common Stock on NASDAQ was $3.14 per share.

  

Retain your Notes : You may choose to continue holding your Notes or otherwise transfer or exchange them in the ordinary course. You will retain the right to receive interest payments on the Notes pursuant to the terms of the Indenture and the Notes. The Notes mature on December 1, 2014 and will pay cash equal to $1,000 per $1,000 principal amount of the Notes on that date. You will also retain the right to exchange your Notes for Common Stock at the Original Exchange Rate (subject to subsequent adjustment as provided in the Indenture) at any time prior to the close of business on the third Business Day (as defined in the Indenture) immediately preceding December 1, 2014. As of January 31, 2013, the closing price of the Notes in the over-the-counter market as quoted on Bloomberg was $1,841.23 per $1,000 principal amount.

The best likely play for note holders is to exchange the notes for stock. For each $1,000 of note value the stock received would be 581.3112 shares. At current market prices, each $1,000 would garner $1,877. That is a substantial premium that is too good to give up.

The biggest question Sirius XM shareholders need to ask is how this impacts the equity. Liberty Media shareholders also have a vested interest in this as well.

While Liberty Media had enough shares to gain effective control of Sirius XM by SEC standards, the calculation did not include these notes or some options. Essentially there is a potential 320,000,000 shares of dilution about to hit this stock. When considering this, Liberty media could be about 160,000,000 shares shy of actual control once and if these bond holder elect to take possession of shares. It should be noted that Liberty Media itself holds some of these notes that equate to about 6 million shares (in rough numbers).

Previously Sirius XM had committed to a $2 billion share buyback program. Liberty had previously stated, prior to taking control, that it would participate in share buybacks at a share for share level. Investors should note that the announcement was made at a time when there was a question as to whether share buybacks would push Liberty into control. Subsequent to that Liberty took actual control.
What I anticipate now is that Liberty media will not participate in the first round of share buybacks. The goal of Liberty would be to get to about 52.5% excluding the 7% notes and stock options. Being at 52.5% would allow liberty insulation from the dilution caused by these notes and options.

At this point whether Liberty participates or not makes little difference to investors. It is key that investors understand this. The big event was Liberty gaining control and inserting its own Board of Directors. Investors need to avoid getting caught up in the minutia as it will not change the course of events.

What we need to understand is that Liberty media wants to be above 50% when considering the dilution. If Liberty is over 50% it will allow for an event like a Reverse Morris Trust. While such an event is likely 18 to 24 months away, it is important to understand the mechanics now.

The Liberty media goal is to recover about $1.7 billion it invested into shares of common stock, and then to sell any remaining high basis stock. After these two goals are completed a spin or Reverse Morris Trust becomes a very real possibility.

Sirius XM took out $1.25 billion in a credit facility. The current use for this money would be to combine it with about $750 million in cash to buy back $2 billion worth of stock. As big as that buyback sounds, it is still not large enough to complete the Liberty media goals. It could take as much as another $2 billion in buybacks or more to get Liberty to a point where it will consider a spin.

Sirius XM will most likely add debt at levels that maintain a 4 to 1 ratio as time passes. This debt load is quite manageable and should not carry a negative impact on the company, as it can service the debt with relative ease.

We are looking at clearing up $550 million in debt with the use of shares. I look for Sirius XM to initiate share buybacks in short order, and perhaps even expand the share buyback program to a bigger number sometime later this year.

Investors need to watch the company EBITDA performance closely in the coming months. If the company decides to go back into the debt markets it will need to refine the 2013 EBITDA guidance upward. Essentially Sirius XM needs to be pointing to growth in EBITDA to absorb the various issues at play. The Sirius XM story remains quite bullish, but there are dynamics that investors need to consider now as you look at longer term growth.

Source: Sirius XM Does Tender Offer On 7% Notes