Once on the verge of bankruptcy, Sirius XM (SIRI) was given a lifeline by Liberty Media (LCAPA), who provided liquidity via $530 million in loans and preferred stock, convertible into 40% of Sirius stock -- effectively giving Liberty Media 40% equity in the company and the right to appoint 40% of Sirius' board seats.
That deal, which closed on March 6, 2009, came with three main restrictions.
- Hedging restrictions: Liberty Media could not engage in hedging activities prior to 12/31/2009.
- Standstill restrictions: Until the second anniversary of the close of the Phase II investment (on 03/06/11), neither Liberty Media nor affiliates may acquire beneficial ownership in SIRI that would result in >49.9% ownership without the approval of the SIRI board. From the second to third anniversaries of the close, Liberty Media may not acquire any beneficial ownership >49.9% unless it is pursuant to an offer for all outstanding shares not owned by Liberty Media at a premium to yesterday's closing price.
- Transfer Restrictions: Liberty Media may not transfer any portion of Sirius holdings to any party other than an affiliate until the second anniversary of the close of Phase II of Liberty Media's investment (03/06/11).
And the takeaways:
- After March 6, 2011, Liberty Media can increase its stake in Sirius to 49.9%.
- After March 6, 2011, Liberty Media is free to buy more than 49.9% of the shares of Sirius, but if it does, it will have to buy the remaining 60% of the shares that it does not already own.
- After March 6, 2011, Liberty Media is free to sell or transfer its stake in Sirius.
Let;s take the first one. On March 7, 2011, Liberty Media is free to increase its stake in Sirius from 40% today to 49.9%. This is a positive for the stock if it happens.
Secondly, Liberty Media can chose to buy more than 49.9% of Sirius, but if it does, it will have to buy the rest of the company. This is a major positive for the stock.
To buy the 60% of the company that it does not already own, Liberty Media would have to pay north of $7 billion. With only $1.5 billion in cash on the books at the end of 3Q10, Liberty Media would have to use its equity or a combination of its equity and asset swaps to accomplish this deal. Liberty Media currently has approximately $7 billion in equity in public companies, plus ownership in private companies valued a $1 billion. Thus, paying for Sirius will not be an issue ... but how to pay will be.
Third, on March 7, 2011, Liberty Media will be free to sell its stake in Sirius (a negative) or transfer part or all of its stake to another entity. The latter can be a positive if done in a tax efficient manner that would boost the value of Sirius shares. A spin-off of Sirius with other Liberty Media assets is plausible.
So March 7, 2011 is a major catalyst day for Sirius, as the scenario of possibilities increases beyond just adding subscribers, stabilizing churn, reducing SAC per gross adds, and growing EBITDA and free cashflow.
Investors take note.