Early this morning while listening to Bloomberg Business Radio, the mention of Liberty Media (LMCA) and its Chairman, John Malone, caught my attention. This was mostly because of my interest in Sirius XM Radio (SIRI), which is majority owned by Liberty. It was too late to pick up on the story, so I went to the Bloomberg web site and found a story that began:
Time Warner Cable Inc., the second-largest U.S. cable company, jumped the most in almost five months in New York trading on renewed takeover speculation.
The gist of the story was that Charter Communications (CHTR), which is now 27% owned by Liberty, has been in discussions with banks to line up financing for a takeover of Time Warner Cable (TWC). It's not just Malone that may be interested in TWC. The number one cable provider, Comcast (CMCSA) was also reportedly being pushed by its shareholders to merge with number two, TWC. Merger news for the cable companies is nothing new.
Malone said in September that a deal with Time Warner Cable makes sense. The billionaire is letting Greg Maffei, chief executive officer of his holding company Liberty Media Corp. , manage any potential transaction process, he said at the time.
Shortly after Liberty bought its stake in Charter this past Spring, Malone discussed the need for consolidation in the cable industry and speculation started that he would use Charter to go after TWC. Although initial offers were rejected, when TWC reported disappointing revenue and customer losses that were greater than expected late last month, speculation again began heating up. Reuters reported:
Time Warner Cable Inc reported a steep decline in video and Internet customers, blaming a month-long blackout of No. 1 U.S. broadcaster CBS Corp and said it was open to consolidation if it would make money for shareholders.
The Reuters article also reported that Malone had discussed a takeover with TWC, "but has been rebuffed so far".
Any takeover of TWC will not come cheaply. Its current market cap is around $37 billion, and if a takeover requires a premium and if Comcast and Charter get into a bidding war, the total cost could be expected to go higher. What may be considered unusual is that while TWC is up more than 7%, both rumored pursuers are also higher, each up more than 2%.
So, why should any of this be of interest to investors in Sirius XM? Because a takeover by Charter will require a lot of money. Aside from the purchase price, acquiring TWC also means taking on its $25 billion of debt. That's a lot for Charter to swallow with its market cap of $13 billion and debt of $14 billion. If Liberty is to provide some of the backing, it is likely that it will have to monetize its largest asset, Sirius XM.
When Liberty bought its initial stake in Charter, it used some of its stake in Sirius XM as collateral for a margin loan. Since then, Liberty has begun selling some of its Sirius XM shares back to Sirius XM to raise money to pay down that loan. As Liberty sells its shares, this begins to eat into its majority ownership position.
For Liberty to raise a significant amount of capital it could again use margin loans to raise capital, or it could accelerate the sale of some of its Sirius XM shares back the company. Using a margin loan has the benefit of allowing Liberty to raise money while maintaining its majority ownership position. However, margin loans have drawbacks since there is the risk associated with the volatility of the underlying asset and it is typically short term debt with a variable interest rate. And, unlike an outright sale where the full sale price would be realized, only a portion of the asset value can be borrowed.
A sale of shares, on the other hand, would initially raise capital equal to the full value of the asset, but soon after there would be taxes due on the gains from those sales. And, as sales start to bring down Liberty's majority position, Sirius XM would need to buy back more non-Liberty owned shares. To accomplish this, Sirius XM would need to significantly increase debt.
There are of other methods that Liberty could use to raise funds from Sirius XM, including directly borrowing money from the company or having Sirius XM pay a dividend. Or, the Charter transaction be an all stock or a mix of cash and stock transaction.
News flow around the three cable companies has been significant all day. The latest story on Bloomberg is that Comcast and Charter will make a joint bid for TWC and split up the assets. Investors in Sirius XM should be paying careful attention to these developments as, in my opinion, they will almost certainly involve capital raising efforts by Liberty.
And, those capital raising efforts are likely to involve the single largest asset of Liberty - its majority stake in Sirius XM.