Liberty's Sirius Preferred Stake Expected to Be Spun Off 18 comments
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By Brandon Matthews
Is the media deal of the century about to take place? According to a Reuters news report, Greg Maffei of Liberty Media (LINTA) expects to “spin-off” Liberty’s preferred stake in Sirius XM Radio (SIRI), which represents a 40 percent interest in the company, “at some point.”
I have been speculating about this since last April, when I first wrote about the prospects of Sirius XM Radio reversing the February deal with Liberty Capital (LCAPA) that staved off bankruptcy.
My suspicions began while reviewing the details of the original credit agreement between Liberty and Sirius XM, which allows for the termination of the agreement up until Dec 31, 2009. This December deadline had stuck out to me as a potential deadline that was agreed to behind closed doors.
Sirius XM Radio has gone to great lengths throughout 2009 to completely repay Liberty Capital under the terms of this agreement. The only remaining issue is what Liberty intends to do with its 40 percent preferred stake, acquired for a mere $12,500, but now valued at approximately $1 billion. With so much profit having already been attained, tax issues would seem to be a moot point, which creates endless possibilities for the disposition of the preferred shares.
When the preferred shares were issued, the price of SIRI shares dropped, as if the preferred shares were already converted to common. In other words, the current share price reflects dilution that hasn’t taken place yet. Maffei’s statement that Liberty will be looking to “spin-off” that stake makes clear that Liberty has no intention of converting those shares to common.
Although the preferred stake is worth 40 percent of Sirius XM Radio’s current market cap, the shares cannot realistically be converted and sold in the market at current market prices. The flood of shares being sold would significantly lower their price, so the preferred stake can likely be repurchased for somewhat less than its current market value.
Now that we know Liberty will seek to unwind its position in Sirius XM, this leaves only two concerns in my mind: How likely is this to occur? And where will Sirius XM get the money for such a deal?
When we look at the relationship of Sirius XM and Liberty, as it has been publicly displayed, it appears to be very good. Liberty execs Maffei and John Malone sit on Sirius XM Radio’s Board of Directors. There also appears to be a swap of executives underway. As former DirecTV (DTV) Chairman and CEO Eddie Hartenstein takes over as the chairman of Sirius XM Radio’s Board of Directors, and I suspect the just-resigned chair, Gary Parsons, will be heading over to DirecTV, which was also a Liberty holding. The relationship of these media moguls suggests that an internal deal can be reached with relative ease.
Which brings us to the point of Sirius XM Radio and its ability to pay for such a deal. Earlier in the year, shareholders approved an additional 1 billion shares to be authorized. I subsequently proposed that Sirius XM Radio could use those shares to raise the capital to repurchase Liberty’s preferred stake. According to the credit agreement which is now in effect dissolved with the repayment of the outstanding debt, Liberty would simply have to approve the sale of shares. I can find no current reason that such shares could not be issued otherwise.
Shareholder dilution is usually a bad thing for investors. In this case, though, reverse dilution would occur. There could also be a deal that involves debt and equity, further reducing the equity costs of such a transaction. Sirius XM has been advantageously repurchasing its own debt, and Liberty has been buying Sirius XM bonds this year, as well.
The effects of such a deal, if it does in fact come to fruition, would catapult Sirius XM shares to a level that would remove any reverse split or delisting fears that may exist in the marketplace. I would expect to see Liberty Media first return its stake to Liberty Capital, after which time I suspect we will see either a slow repurchase of Liberty’s preferred stake by Sirius XM Radio, or the media deal of the century. Someone will be buying that stake. It might as well be Sirius XM itself.
Disclosure: Long SIRI
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This article has 18 comments:
On Nov 15 11:53 AM MakingMovesmet wrote:
> How can reverse dilition occur? If Sirius needs to sale the billion
> shares that where authorize in order to pay back liberty. Would it
> not cause more dilition? Because of the amount of shares coming to
> the market.
Further dilution could cause SIRIXM to be sold (which is inevitable since it cannot fund R&D, Branding and Advertising efficiently) at an extreme discount.
Too big of a chance since the majority of the educated investment people understandi SIRIXM equity is already too diluted.
Just my opinion but very very bad move for us SIRI Longers.
I agree with Tuna Amobi the R/S will happen within 6 mos. or less.
RAF and I only differ on how the negotiations will go.
On Nov 15 12:57 PM R A F wrote:
> There is absolutely no doubt that Sirius XM is a highly attractive
> property for any one of many major entities in the media and/or wireless/internet
> industries. The company now has all the core elements in place to
> ensure continuing growth in enterprise value moving forward. For
> these reasons, the share price will take care of itself and any merger/acquisition
> negotiations that are sure to come in the future will involve proper
> evaluations regarding the benefits to both parties going forward.
> The technicalities as to dilution and share price would all be addressed
> at that time, by the parties in their negotiation. Bottom line -
> Sirius XM will definitely be in play sometime in the future, due
> to the substantial added value this company can bring to any one
> of the major companies in media and/or wireless/internet arenas -
> wishing to build value into their product. The growing awareness
> of all this suggests that any interested entities would probably
> be better acting sooner rather than later.
>
> On Nov 15 11:53 AM MakingMovesmet wrote:
On Nov 15 01:38 PM Pell wrote:
> I agree with RAF sooner than later. SiriXM is not a stand alone company.
> If we were talking smaller businesses we would be saying SiriXM needs
> venture capital. So on a bigger scale I say SiriXM needs Mr. Malone
> and his money.
>
> RAF and I only differ on how the negotiations will go.
The expenditures should have been reduced a long time ago. This would have created a larger cash reserve. There were articles after articles about the mismanagement and many here refuse to accept that. The last blog thread from Nov. 11 posted a comment from an independent advisor who described it as the worst management ever. Yet know one here bashed that claim. There was a blog recently about SIRI from Audit serv. who said SIRI is at the highest media risk. In the Los Angeles times aricle about Hartenstein there was a reference about SIRI facing media challenges from the changes in media delivery, ipod and streaming. Yet some people here will never recognize that many people in the investment world have identified the problems with SIRI as run by the current management. But some here are always
quick to bash and tear down someone writing about SIRI objectively
and they go on to praise, praise praise SIRI management. It has nothing to do with the product but who is running the show. So now Liberty walks away with a billion and SIRI has to scramble again to deal with possible M & A and debt. This exactly what I was saying about how leveraging works and the backroom deals that go. Let the leveraging begin. As some one here just said the longs are going to get caught in the cross fire. Which is exactly what happens thru back room leveraging.
He takes his money out upfront. Those who thought he was going to get it back out of revenue now see my point. They keep leveraging to take money out against the value and assets. I know there are a lot here who are staunch supporters and bash everyone who is looking deeper into the analysis of managements
role, but you are bashing the wrong people. You should take it out on those who are running SIRI into the hole. And some should be thankful there are people calling them out on this. Don't get me wrong we all want thep/s up, how is it going to happen with this management.
However I don't think it is going to happen. Management knows they are not able to take this company to the next level and they also know additional dilution of equity will make their balance unattractive to suitors who want this company.
But again credit to you for anticipating a move in that direction. But unfortunately I question the messanger above who has already proved his opinions are flawed and one sided.
Siri Long betting on Malone.
All I can think to say is "WoW" what an aritcle. What a possibility that Sirius could repurchase the stake from Liberty before December 31st. It is easy enough to see where Sirius could come up with the funds for such a transaction. This could be the piece of the puzzle that makes the February deal a godsend for the company. After all, as you state in the article, the relationship between Liberty and Sirius seems to be in good standing. Also, Liberty has made an enormous profit on the deal after only 8 months---why not sell it back to Sirius---it would be almost fair. It would no doubt increase the market cap for Sirius as well. I suppose we will have to wait and see what happens, but this could really turn things around quickly.
Long SiriusXM
I have no beef with anyone and just ascertain which fundamentals work and which are wrong. Sometimes managements are wrong,
ie. Lehman's, Bear Stearns. It's nothing against Mel and Co., it's just are they doing the right thing. When the SIRI was on the brink they did little to cut the expenditures, especially on high price talent and some of their fees. This tells everyone they were not willing to sacrifice for the survival of SIRI. The play with Malone fell right into the category of leverage. In otherwords, how was SIRI going to pay Malone. The leverage play as we now see might be for Liberty to sell their stake, less than actual market value, and walk away with a bundle. The problem is that, if SIRI can not buy the stake back, then Malone could sell to another investor who is only interested in the leverage investment play again and not sat rad. They just buy the stake based on the assets and values and when the time comes they will sell their stake and so on, and so on. They have no interest in sat rad, just the leverage play. I mentioned in a previous blog the money game is outside the actual sat rad business. They will only want to protect their investment not the sat rad product.
Again I am only offering views and don't know concretely what might happen. I bring it to the blog to open and broaden a discussion and read others views with out animous.
makes sense RAF but there are too many egos on the board to give up control-Mel doesnt want money- he wants notoriety-you could see it in his seated posturing while on cnbc-aint gonna happen-
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