After the market closed yesterday, Liberty Media (NASDAQ:LMCA) announced that it withdrew its offer to merge with Sirius XM Holdings (NASDAQ:SIRI) and that it would create two new tracking stocks - Liberty Broadband Group and Liberty Media Group. The expected timing of the two new trackers will be sometime in Q3 according to a statement released by Liberty CEO Greg Maffei:
We are creating two new tracking stocks, Liberty Media and Liberty Broadband... We expect to complete the creation of the new tracking stocks by the third quarter.
Liberty Broadband Group
Liberty Broadband will be comprised of Liberty's stake in Charter Communications (NASDAQ:CHTR), as well as its holdings in Time Warner Cable (TWC), and Liberty subsidiary, TruePosition. However, in the land of Liberty where restructurings are not an uncommon occurrence, nothing is ever quite so simple. Each Liberty shareholder would receive one share of the Liberty Media Group tracking stock and four shares of the Liberty Broadband Group tracking stock for each A or B series share of Liberty Media common stock. In addition to the tracking shares, the Liberty common stockholders would receive one subscription right for each five shares of Liberty common stock.
This subscription right would allow the holders to buy shares at a 20% discount to the average price of Liberty Broadband Group in its first twenty days of trading, and the right would expire after forty trading days. Any proceeds from the exercise of the subscription rights would go to the Liberty Broadband Group. The rights are also expected to be publicly traded.
Liberty Chairman John Malone has a stated goal of bringing about consolidation in the cable industry, with the objective of creating better leverage in negotiations with content providers. The funds from the sale of new shares through the subscription rights could be used to "support Charter in its expansion efforts."
In addition to the assets and cash raised by sale of new shares, Liberty Broadband Group will also have the liabilities of TruePosition and "a note obligation from the Liberty Broadband Group to the Liberty Media Group" and a call option liability associated with Liberty's Time Warner Cable shares.
Liberty Media Group
Liberty Media Group will have all the remaining assets and liabilities of Liberty Media, including its stakes in Sirius XM, Live Nation (NYSE:LYV), Barnes & Noble (NYSE:BKS) and the Atlanta Braves, as well as other interests. Liberty Media's 53% stake in Sirius XM had represented approximately two thirds of the assets of Liberty Media. With the new structure, Sirius XM would be closer to 80% of Liberty Media Group. What are the implications for the owners of the 47% of Sirius XM not owned by Liberty?
First, Liberty has withdrawn its share exchange offer. Second, Liberty announced that it would resume the $500 million share sale to Sirius XM which had been put on hold. When it was put on hold, there were 92,888,560 shares remaining to be sold for a total of $340 million and there were two installments remaining. The second was to have taken place in January and the third (and smallest amount) was scheduled for April 25th. However, the sales could be moved up or delayed depending on the cash available at Sirius XM. For those that may have forgotten, the share price had been fixed at $3.66 based on the market prices of Sirius XM during the 10 trading sessions starting with the third day after Sirius XM released its Q3 earnings.
One of the more interesting aspects of the press release was another comment by Maffei:
In light of the tracking stock distribution, our offer for SiriusXM is no longer applicable. Depending on market conditions, we look forward to further discussions with the SiriusXM Special Committee.
Why would Liberty be looking forward to further discussions with the Special Committee? And under what market conditions would they take place?
Liberty has found another way to raise cash to fund cable opportunities, but the Broadband Group will be generating very little cash after its initial subscription offer. If that's the situation, how will it be able to help Charter fund cable opportunities? Margin loans on the Charter stock? This would also be somewhat limited, and it would be less than the margin loans currently available to Liberty Media.
As I noted above, it seems as though Liberty doesn't seem to do anything in a simple manner. One of the drawbacks in the exchange offer that was withdrawn is that Liberty's assets trade at a significant discount, and that was unappealing to certain Sirius XM shareholders that would have to approve the offer.
I doubt that we have seen the last of the Special Committee, or that Malone or Maffei are ready to give up on full ownership of Sirius XM. The new Liberty Media Group will be much more heavily concentrated in Sirius XM, and it's possible that Liberty is expecting less of a discount once the Liberty Media Group tracker is created. If that's the case, it would provide another opportunity for Liberty to make an exchange offer at a price that would be more appealing to the other 47% of Sirius XM shareholders.
Is it just possible that could create the market conditions that would lead to "further discussions with the SiriusXM Special Committee?"
Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I actively trade SIRI. In addition to my long positions in SIRI, I have January 2015 $4 covered calls written against several of these positions. I may initiate new covered call positions or close out or open new positions in SIRI at any time. I have no plans to trade any of the other stocks discussed in this article within the next 72 hours