On February 1st, Sirius XM Radio (NASDAQ:SIRI) issued a notice to the holders of its 7% Exchangeable Senior Subordinated Notes (or Notes) due 2014. The notice was required when Liberty Media (NASDAQ:LMCA) purchased enough shares to acquire a majority stake in Sirius XM and stated (in part):
On January 17, 2013, Liberty Media filed a Form 4 with the Securities and Exchange Commission disclosing that on January 15, 2013 it, indirectly through its subsidiaries, purchased an additional 50,000,000 shares of Common Stock. As a result of such purchase, Liberty Media became the direct or indirect beneficial owner of common equity representing more than 50% of the voting power of the Company's common equity.
As a result of the foregoing (collectively, the " Liberty Transactions "), a Fundamental Change (as defined in the Indenture) occurred on January 17, 2013 (the " Effective Date "), and accordingly each Holder has the Purchase Right described herein.
The Fundamental Change clauses allowed the holders of the Notes to redeem those Notes early for cash, or to exchange them, within the notice period, for 38.138 additional shares per Note. On March 4th Sirius XM filed a Schedule TO detailing the results of the offer. As expected, no Note holders accepted the cash redemption offer since the offer was substantially less than the value of both the underlying shares and the market price of the Notes.
Regarding the offer of 38.138 additional shares, only $47,630,000 in principal amount of the Notes was exchanged, and it resulted in the issuance of 27,687,850 shares of Common Stock. The $47,630,000 represents 8.7% of the $550 million debt issue.
There are several, mostly minor, implications as a result of the exchange:
- Sirius XM will save $140 in cash interest cost on each of the 47,630 Notes over the two-year period ending December 1st, 2014, or a total of $6,668,200
- 2013 interest expense will decline by $3,334,100
- $555,683 in interest expense accrued in Q4 2012 will be reversed in Q1 2013
- There are 27,687,850 additional shares issued and outstanding
- The diluted share count - which had not included the Additional Shares - will increase by approximately 1,816,500 shares (47,630 Notes * 38.138 Additional Shares/Note = 1,816,512.94 shares, however, since fractional shares are not issued, the actual number will be slightly less).
- A non-cash charge of up to $5.7 million could be recorded for early extinguishment of debt in Q1 2013.
More importantly, the fact that so few holders of the Notes chose to exchange their shares also means that Liberty will not fall back below its majority ownership position. And, since Liberty remains at a majority position, it has the option of participating in the share buyback on a pro rata basis at any time without jeopardizing that majority position.
The lack of participation by the Note holders means that the Fundamental Change will result in minimal changes to free cash flow, interest expense, earnings and leverage ratios for 2013. It remains to be seen whether the low participation rate will affect the timing of Liberty's plans to participate in the previously announced Sirius XM $2 billion share buyback and recover some of the nearly $1.7 billion spent to get to a majority position over the past year.
Before the market opens on March 5th, Liberty CEO Greg Maffei is scheduled to speak at the Deutsche Bank 2013 dbAccess Media, Internet & Telecom Conference. It is a near certainty that he will once again be asked about Liberty's plans for Sirius XM. Investors may get the opportunity to hear a few new thoughts on Liberty's future plans regarding its Sirius XM asset - an asset that currently represents more than three quarters of Liberty's market capitalization.
Additional disclosure: I have $3.50 January 2014 covered calls against most of my SIRI position. I may initiate (or close) a buy stock/sell option position in SIRI at any time or day trade blocks of shares at any time to take advantage of the price volatility.