Liberty Media (NASDAQ:LMCA) and its investors gained a little bit of insight Friday evening in the quest to bring Sirius XM (NASDAQ:SIRI) into the fold. Sirius XM's independent directors announced three key elements of the process just after the market closed. The three key elements are as follows:
- Evercore Partners LLC will act as the advisor regarding the proposed transaction
- Weil, Gotshal & Manges LLP will act as legal advisor
- The special committee has agreed to delay share repurchases of SIRI shares held by Liberty Media.
These three actions show a very deliberate and well thought-out course by the independent directors of Sirius XM. If nothing else, Sirius XM needs to do this by the numbers to avoid litigation. Even if the company does everything by the numbers, there are some litigators that will still seek to cut into the action. That being said, the company remaining above the fray minimizes the chances of any real threat on a legal front.
The selection of Evercore is a very interesting one. Evercore recently established a $4.50 price target on Sirius XM. While some investors may jump to the conclusion that this translates to Evercore making a recommendation that Sirius XM insist on $4.50, that is highly unlikely. This deal is more about present value than future value and premiums. In theory, the future value will still exist and current investors will still participate in these future values in one form or another.
The fact of the matter is that Evercore, in my opinion, will recommend that the deal be sweetened to a small degree from the original proposition. Evercore will certainly understand the possible synergies in the LMCA capital structure that will happen if Sirius XM becomes a subsidiary.
I think that the sweet spot is for Evercore to recommend that the exchange ratio be 0.082 shares of Liberty Media Series C stock for each share of Sirius XM instead of the original 0.076 shares. In my opinion, the companies will settle in the neighborhood of 0.080 and the deal will come to fruition.
Evercore is bullish on the Sirius XM story, but also likely realizes that the story can continue on its current path even under full Liberty control. In theory, the capital that Sirius XM brings to the table can be used to appreciate value in a few ways. One is dividends, which create tax leakage. A second is share repurchases, and a third is acquisitions. The biggest shift in the Sirius XM story would be from one of share repurchases to one of acquisitions. In my opinion, the weight of the Evercore opinion will be pretty substantial, and may well be the catalyst that allows this deal to move forward, or simply fade away.
The Legal Side
From a legal perspective, the Sirius XM board simply wants to conduct all of this business in a manner that passes legal muster, SEC requirements, and serves the investors of Sirius XM. In my opinion, the road taken thus far has been on the straight and narrow from a legal perspective and there is a clean slate to work from. There will certainly be a handful of opportunistic lawyers and investors that try to jump into this game, but Sirius XM has beaten all comers on that front in the past. This will be nothing new for a company that is well seasoned in fending off would-be "claim jumpers". Liberty Media itself has outstanding legal representation and has been perhaps even more successful. I do not see either the Liberty team or the Sirius XM team stumbling here.
Pause in Share Repurchasing
Sirius XM did announce that it will cease from buying back SIRI shares held by Liberty Media under the terms of a deal struck last Fall. The original deal called for Sirius XM to buy back $500 million worth of SIRI shares from Liberty in conjunction with $1.5 billion bought on the open market. Ironically, the terms of the original deal had a very real potential to increase Liberty's ownership in Sirius XM depending on timing. In my opinion, Sirius XM will likely put all share repurchases on hold so as to keep this possible transaction very pure from a legal standpoint. If the company agreed to delay purchasing Liberty's SIRI stock, it would not make much sense to buy open market shares and increase Liberty's stake in Sirius XM. At the moment, Sirius XM has delayed any further repurchase from Liberty until April 25th. On that day, the company is slated to buy $340 million worth of Liberty's SIRI shares at a price of $3.66.
What Does This Mean For Investors?
Liberty investors can now rest easy to a certain extent. A viable offer is on the table, Sirius XM agreed to stop buying from the Liberty stake, and advisors have been engaged.
Sirius XM investors have a bit more to think about. The Q4 earnings will be reported in a bit over a week, and while the company will have met guidance, some numbers could be challenging in the short term. Sirius XM launched a satellite in Q4, acquired Agero, and had the GM deal for satellite radio installations shift from supplying great revenue on every satellite radio installed to one that foregoes some of that revenue to save in the revenue share on the back end. Essentially the new GM deal will deliver some up front hits for the benefit of better back end numbers as time passes.
Both Liberty Media and Sirius XM will likely have a bit of a ceiling on each equity until we learn what the independent directors of Sirius XM come up with. I would imagine that we are a matter of a couple of weeks away from such an announcement.
There is a deal in all of this somewhere. Waiting may well be the hardest part. Stay Tuned!