Is Sirius's Dilution Actually Dilutive to Shareholders?

When is dilution not dilutive to shareholders? Quite possibly when it involves Sirius XM Radio (SIRI)! I never thought I'd state this, but dilution of Sirius XM shares may actually be a good thing for shareholders. I realize at this point of the article, I've probably lost half my readers. For the ones that stuck around to see what hair tonic I'm selling today, I'll continue.

Sirius XM investors recently underwent a 40% share dilution due to a last minute deal with Liberty Media (LINTA). What I've learned of John Malone is that he is not the corporate raider that some think he is. The recent Sirius XM filing states that:

" Liberty Media Corporation has informed us that, at this time, it does not intend to exercise its rights to appoint additional members to our board of directors."

At the time of the deal, Sirius XM stock had been pummeled down to just a nickel, making any equity offering worthless at a time when the company was under siege by short sellers and bondholders. The Liberty deal itself, however, was never set in stone. The SEC filing at the time makes clear that:

If, prior to December 31, 2009, we elect to terminate the Investment Agreement (as defined below), the lenders under the Sirius Credit Agreement may require prompt repayment at 105% of face amount. (source)

If Sirius XM was to issue only an additional 1 billion shares of stock in order to reverse the Liberty deal, it would have the net effect of removing the 2,586,976,762 shares that Liberty's preferred stock represents. The total number of fully diluted outstanding shares would thus be REDUCED by more than 1.5 billion shares, which of course benefits Sirius XM shareholders.

Skeptics have pointed to the Liberty deal as only a reprieve of sorts, citing an increased interest rate over the former bonds which were repaid. Reversing the Liberty deal through such an equity offering would reduce Sirius XM's debt load simultaneously.

Position: Long SIRI

Comments

[Siriphone:]

Interesting spin!!!

Apr 22 06:31 AM

[Mrcody:]

Yesterday bash and today pump?

Apr 22 07:40 AM

[Neal Barkett:]

Mrcody, that’s the real world of the stock market. It comes down to interpretation. We all are looking for an intelligent straight forward answer to why a company makes a move that is sometimes baffling. But also in the mix are how the market 1st perceives it and when the dust settles what the reality of a move is and was it a good decision. This is all speculation & to interpret the information that is provided. But we are looking for answers and it comes down to the same speculation used (as an analogy) in the upcoming NFL draft. We listen to experts who are close to the situation and you can have various opinions on who's drafting who and in what round. I give Brandon credit, he's open minded and not afraid to look at different scenarios as time goes on. He's not letting his ego get in the way of having an open mind. Keep in mind, he’s not sitting in on meetings w/ the Mel & Malone.

Apr 22 08:30 AM

[163888:]

Neal Barkett, Brandon is wrong plan and simple. Try reading the total agreement. Once the second part of the deal was complete, that took away all the options of ever getting those shares back. Brandon is completely wrong. Just like he was about the bankruptcy scare he put out just after the Malone deal was announced, based on a boiler plate statement and he will be proven to be wrong about a 2 million sub loss in 2009. Yes thats right not 200,000 not 300,000 or even 500,000 but 2 million net subs. Now while many figured that they may lose some subs noone is calling for 2 MILLION. I'll bet dollars to donuts Brandon trys to say he was right when they lose some subs next quarter forgetting as he does that he didn't say a few hundred thousand but 2 MILLION.

Apr 22 09:02 AM

[Satwaves:]

www.sec.gov/Archives/e...


On February 17, 2009, we entered into a Credit Agreement (the “Sirius Credit Agreement”) with Liberty Media Corporation, as administrative agent and collateral agent. The Sirius Credit Agreement provides for a $250 million term loan and $30 million of purchase money loans. Concurrently with entering into the Sirius Credit Agreement, we borrowed $250 million under the term loan facility. The proceeds of the term loan will be used (i) to repay at maturity our outstanding 2½% Convertible Notes due February 17, 2009 and (ii) for general corporate purposes, including related transaction costs.

The loans under the Sirius Credit Agreement bear interest at a rate of 15% per annum. Commencing on March 31, 2010, the loans amortize in quarterly installments equal to: (i) 0.25% of the aggregate principal amount of the loans outstanding on January 1, 2010 and (ii) after December 31, 2011, 25% of the aggregate principal amount of the loans outstanding on January 1, 2012. The loan matures on December 20, 2012. We paid Liberty Media Corporation a structuring fee of $30 million in connection with the Sirius Credit Agreement. In addition, we will pay a commitment fee of 2.0% per annum on the unused portion of the purchase money loan facility.

*******If, prior to December 31, 2009, we elect to terminate the Investment Agreement (as defined below), the lenders under the Sirius Credit Agreement may require prompt repayment at 105% of face amount.********

excerpt~Phase Two: Investment Agreement

On February 17, 2009, we entered into an Investment Agreement (the “Investment Agreement”) with Liberty Radio, LLC (the “Purchaser”), an indirect wholly-owned subsidiary of Liberty Media Corporation. Pursuant to the Investment Agreement, we agreed to issue to the Purchaser 12,500,000 shares of convertible preferred stock with a liquidation preference of $0.001 per share in partial consideration for the loan investments described herein.

Upon expiration of the applicable waiting period under the Hart-Scott-Rodino Act, the preferred stock will be convertible into 40% of our outstanding shares of common stock (after giving effect to such conversion). Issuance of the preferred stock is subject to the satisfaction of certain conditions, including the conditions to funding under the XM Credit Agreement described below.

Pursuant to the Investment Agreement, we have agreed to various covenants and agreements, including not to solicit or encourage alternative transactions or, subject to certain exceptions, to enter into discussions concerning, provide confidential information in connection with, or approve or recommend, any alternative transaction until April 15, 2009. If, prior to April 15, 2009, we receive an alternative proposal that our Board of Directors concludes in good faith is a Superior Proposal (as defined below), our Board of Directors may terminate the Investment Agreement in order to transact the Superior Proposal.

*******After April 15, 2009, we may terminate the Investment Agreement if our Board of Directors determines it is in our best interests to do so. In either of those events, we will pay the Purchaser a termination fee of $7 million. “Superior Proposal” means a bona fide written alternative proposal that our Board of Directors in good faith determines, after consultation with its legal and financial advisors, would, if accepted, be reasonably capable of being consummated, taking into account legal, financial, regulatory, timing and similar aspects of the proposal and the person making the proposal, and would, if consummated, result in a transaction more favorable to our stockholders from a financial point of view than the transaction contemplated by the Investment Agreement.*****

Apr 22 09:20 AM

[Satwaves:]

Phase 2 of the agreement for the mentally challenged...

*******After April 15, 2009, we may terminate the Investment Agreement if our Board of Directors determines it is in our best interests to do so. In either of those events, we will pay the Purchaser a termination fee of $7 million. “Superior Proposal” means a bona fide written alternative proposal that our Board of Directors in good faith determines, after consultation with its legal and financial advisors, would, if accepted, be reasonably capable of being consummated, taking into account legal, financial, regulatory, timing and similar aspects of the proposal and the person making the proposal, and would, if consummated, result in a transaction more favorable to our stockholders from a financial point of view than the transaction contemplated by the Investment Agreement.*****


On Apr 22 08:28 AM 163888 wrote:

> Brandon your an idiot, Why dont you read the whole agreement of the
> deal. It is a done deal after the second part of it was done. Now
> while they can pay back the money, they wont get the shares back
> just like they wont get the 30 million. Those both could be considered
> fees to the deal.

Apr 22 09:21 AM

[El Guapo jefe:]

Wall of Text-Critical hit 12,000 points

Apr 22 09:57 AM

[El Guapo jefe:]

pwnt

Apr 22 11:18 AM

[burnout:]

"We paid Liberty Media Corporation a structuring fee of $30 million in connection with the Sirius Credit Agreement."
I get that this money is gone.

"Pursuant to the Investment Agreement, we agreed to issue to the Purchaser 12,500,000 shares of convertible preferred stock with a liquidation preference of $0.001 per share in partial consideration for the loan investments described herein."

If the deal is voided... "If, prior to December 31, 2009, we elect to terminate the Investment Agreement (as defined below), the lenders under the Sirius Credit Agreement may require prompt repayment at 105% of face amount."... I do not see where they get to keep the shares.

" After April 15, 2009, we may terminate the Investment Agreement if our Board of Directors determines it is in our best interests to do so. In either of those events, we will pay the Purchaser a termination fee of $7 million."
If the investment agreement is terminated why would they keep the shares?
At least that is the way I read it, but I have been wrong before...married twice.

Apr 22 11:28 AM

[holmesnmanny:]

Well, I would look at it the other way in that it doesn't say that they have to surrender the shares if the deal is voided therein.

Apr 22 11:46 AM

[johnnyirishXM:]

The problem Brandon is having is that he's quoting from the shortened 10-k filing,in the original investment filing it says in section:4.6 that the deal is closed when second phase is concluded and preffered shares are issued..
the wording is company has till 4-15-2009 or earlier if closed to not solicit proposals,but if after that date,4-15-2009 it hasn't closed yet it has till dec.2009 or earlier if closed to terminate agreement..


On Apr 22 11:28 AM burnout wrote:

> "We paid Liberty Media Corporation a structuring fee of $30 million
> in connection with the Sirius Credit Agreement."
> I get that this money is gone.
>
> "Pursuant to the Investment Agreement, we agreed to issue to the
> Purchaser 12,500,000 shares of convertible preferred stock with a
> liquidation preference of $0.001 per share in partial consideration
> for the loan investments described herein."
>
> If the deal is voided... "If, prior to December 31, 2009, we elect
> to terminate the Investment Agreement (as defined below), the lenders
> under the Sirius Credit Agreement may require prompt repayment at
> 105% of face amount."... I do not see where they get to keep the
> shares.
>
> " After April 15, 2009, we may terminate the Investment Agreement
> if our Board of Directors determines it is in our best interests
> to do so. In either of those events, we will pay the Purchaser a
> termination fee of $7 million."
> If the investment agreement is terminated why would they keep the
> shares?
> At least that is the way I read it, but I have been wrong before...married
> twice.

Apr 22 12:38 PM

[burnout:]

I think Brandon is taking the wording the way I read it. If the deal is reversed it is completely reversed. The only cost of the deal would have been the 30 mil fee to set it up and the interest on the loan. Plus of course the penaltys involved to reverse it. The way it is worded I can see how he gets that from the document. What 163888 says also makes sense from a common sense standpoint, once the shares are issued how do you get them back.
Still the board would have to get shares authorized to raise the funds and if Liberty thought they were going to loose 40% of the company for a $7,000,000 penalty do you think they would let that happen?

Apr 22 12:54 PM

[burnout:]

johnnyirishXM,
I only read the 10-k, if the agreement is closed as you state than I would agree it is a done deal. That makes it very clear what Tyler was saying.

Apr 22 12:59 PM

[163888:]

OK, I tried to give the common sence and short answer. You forced me to repost homer985s long wordy answer as to why Brandon is wrong.

Well, I see that Brandon is still sticking by the article today - even quoting eroneously again from the same 8-K, that is in my opinion misleading. Okay, I've let him suffer long enough -- here are the links and why he is wrong... although I'm only posting it over here...

Here is the actual Investment Agreement:
www.sec.gov/Archives/e...

Here is the Certificate of Designations for the Series B-1 Preferred Shares:
www.sec.gov/Archives/e...

Here is the Certificate of Designations for the Series B-2 Preferred Shares:
www.sec.gov/Archives/e...

If you go to section 4.6 on page 16 and section 5.15 on page 40, it covers the termination process. Section 5.15 even notes that if the agreement is terminated -- all liabilities and obligations to each party will terminate EXCEPT Sirius' obligations under the Registration Rights of the preferred shares... that is because Liberty would continue to hold the shares and Sirius is still obligated to register them. Furthermore, at no point in Section 4.6, does it state that Liberty is obligated to return the preferred shares. The fact is, Liberty purchased the Preferred Shares from Sirius for $12,500 - and they are under no obligation to return them to Sirius. Yes, Liberty PURCHASED the Preferred Shares from Sirius. Bet you didn't know that, did you Brandon?

The portion of the 8-K that Brandon keeps referring to, is a shortened quote taken from Section 4.6 - which is primarily how Sirius can get out of the agreement prior to Phase II closing. However, as you all know, Phase II closed on 3/6/2009... making that point moot. The agreement does continue on and state that Sirius can still terminate the agreement(s) after the non-solicitation period (after Phase II is closed), whenever they want. For which there isn't even an end date to such an option -- however, they are obligated to a $7MM termination fee... while at the same time, Liberty is not obligated to return the shares. The 12/31/2009 date is for if Phase II is not closed yet -- again, that is moot.

Brandon really should just give up on this one. His new site is looking bad over this.

Apr 22 05:13 PM

[Asitoughtobe:]

Brandon,

Please stop comparing yourself to Jim Cramer.

To the other side of Brandon's argument I provide the following analogy.

A contract in simple terms includes the following: an offer, acceptance and consideration.

In the instant case the contract or agreement entered into on "February 17, 2009, we entered into an Investment Agreement (the “Investment Agreement”) with Liberty Radio, LLC (the “Purchaser”), an indirect wholly-owned subsidiary of Liberty Media Corporation." includes the following:

Liberty "Offer" of financing to SIRI ,
"Acceptance" of offer by SIRI,
"Consideration" within agreement includes fees, interest and convertible preferred stock shares in SIRI.

"After April 15, 2009, we may terminate the Investment Agreement if our Board of Directors determines it is in our best interests to do so. In either of those events, we will pay the Purchaser a termination fee of $7 million. “Superior Proposal” means a bona fide written alternative proposal that our Board of Directors in good faith determines, after consultation with its legal and financial advisors, would, if accepted, be reasonably capable of being consummated, taking into account legal, financial, regulatory, timing and similar aspects of the proposal and the person making the proposal, and would, if consummated, result in a transaction more favorable to our stockholders from a financial point of view than the transaction contemplated by the Investment Agreement."

If the contract is terminated, common sense says the fees are earned, the monies are repaid with appropriate amortized interest payment and the convertible preferred stock shares are returned.

Apr 23 12:33 PM

[Asitoughtobe:]

And today it has been confirmed (SIRI Investor Relations) that the preferred shares have been issued, delivered and are outstanding.

The only way the outstanding shares are retired is for SIRI to buy them back, and retire them, end of story.

May 06 10:08 PM