Speculation on Antitrust Clearance for Liberty / Sirius XM

Includes: LMDIA, SIRI
by: Satwaves

By Brandon Matthews

Last week, it was reported the the Department of Justice and Federal Trade Commission had given the green light to Liberty Media (Nasdaq: LMDIA) with regards to a proposed transaction with Sirius XM Radio (Nasdaq: SIRI). This has fueled investor speculation of anything from a possible increased equity stake, a planned conversion of Liberty’s preferred stake in Sirius XM to common, to an all out tender offer being planned.

As usual, being a retail investor in Sirius XM requires an accounting and law degree. I’ve personally been in the business for nearly 20 years. and this is the first time I’ve come across this issue. Although any of the above could apply, I believe this is simply a necessary step in Liberty’s planned purchase of $150 million of Sirius XM’s recent note offering, which will be used to refinance the company’s 2012 term loan and 2013 notes.

The press release surely seemed to indicate that a tender offer or increased equity stake is imminent. With the Liberty/Sirius standstill agreement in place, I find it unlikely that a tender offer would be forthcoming at this time. Furthermore, Liberty CEO Greg Maffei has stated that the company would not be increasing its equity stake due to questions surrounding Sirius XM’s NOLs, and stated unequivocally that Liberty would “never” convert its preferred to common shares to cash in on its gains.

In reviewing the guidelines for reporting such transactions, there are many reasons that a company would be required to file with the FTC. John Malone learned this lesson the hard way just one year ago, when the Justice Department brought a lawsuit against him (pdf) for exercising two options one day too early, in which a judgment was ordered in the amount of $1.4 million.

In general, the Act (pdf) requires that certain proposed acquisitions of voting securities, non-corporate interests (“NCI”) or assets be reported to the FTC and the DOJ prior to consummation.

The key words are assets and non corporate interests. The FTC has established thresholds for certain transactions that require reporting prior to their consummation. These thresholds are revised annually and were recently revised in late February. With Liberty’s announced intent to purchase $150 million of Sirius XM’s 2015 8.75% notes, Liberty will exceed one of the asset thresholds that require regulatory clearance.

There are a lot of potential ways to look at this. Liberty currently owns 55,221 of Sirius XM’s 9-5/8 Senior Secured 2013 notes that are being called. This will result in Liberty falling below the new threshold of $253.7 million. The planned purchase of the replacing notes will then catapult the company well above it. This does not include any open market purchases that may have been made in the current quarter.

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The fact that these particular notes are not convertible into equity and have no voting rights, is likely the reason that they were granted early termination by the Justice Department. There is one other note. According to the table above, Liberty currently owns $11 million of Sirius XM’s 7% notes. These are convertible at $1.87 into 5.8 million Sirius XM shares. If Liberty intends to convert these to common, that would also trigger a change that would require filing.

Hart-Scott-Rodino filing. In 2009, the acquisition of voting securities in excess of $65.2 million may trigger the Hart-Scott-Rodino filing threshold. Acquisition of convertible voting securities is exempt from this requirement, but the subsequent conversion of convertible bonds into common stock may be subject to the Hart-Scott-Rodino provisions.

Disclosure: Long SIRI