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By Relmor Demitrius

Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin has been mentioning for over a year now how Sirius XM intends to use their free cash flow. Now that the company has been profitable for over 2 years now straight, it is time for Mel to begin laying out plans to investors how they can expect a return on their capital. Mel suggested three standard ways of doing this. The one Mel has said would happen most likely would be a share buyback plan and the focus of this article. The other ways mentioned were through acquisitions, although Mel stated he sees none right now that would add shareholder value, or a cash dividend (least likely to occur). One question raised recently was would a buyback affect how many shares Liberty Media (LINTA) received upon conversion? The answer is yes. It would. To find the answer you simply need to read the filings in question.

In March of 2009 Liberty had to register a form 13D, which is required by the SEC when anyone obtains more than 5% of any class of a companies shares. A statement of beneficial ownership among other things is required to be on this form. So saying Liberty owns 40% of Sirius XM is impossible for this form. They need an actual share count. So the date March 4th was used as the "snapshot" of Sirius XM's total outstanding shares at the time, to determine how many shares exactly is the 40%. Due to minor fluctuations in the outstanding count before the deal was finalized, the percentage came in at 40.15%. The total shares Liberty would have received if they converted the day they filed their 13D would have been 2,586,976,761 shares. Which is exactly 206.9581409 shares of common per 1 shared of Liberty preferred. Here is from the Liberty filing itself.

"At the option of the holder, each share of B-1 Preferred Stock is convertible into 206.9581409 shares of Common Stock, subject to adjustment in accordance with the provisions of the Certificate of Designations of the B-1 Preferred Stock filed with the Secretary of State of the State of Delaware on March 5, 2009 ("B-1 Certificate of Designations")."

So you can clearly see this amount is not set in stone, especially once you understand why they registered that number of shares to begin with. It was required they attach an exact number for the purposes of meeting Delaware law requirements. It clearly states subject to adjustment. Now, the outstanding share count in 2 years has barely moved. The 1% change required to re-file the amount hasn't occurred. When it does you would see clearly that the intention of the agreement is to always try to get to 40% upon conversion. So a split, authorized shares moving to outstanding, a buyback, or any other change would result in a recalculation of the amount. Now Liberty of course is protected from Sirius XM from being diluted and having its percentage lowered. It's an "adjustable" share count of the 40% value, but what is not adjustable is the 40% itself. Please make that distinction here and now. Here is more wording on the variable condition of this share count of 2.5 billion.

"a) The Reporting Person beneficially owns 2,586,976,761 shares of Common Stock, which represent 40.15% of the shares of Common Stock deemed outstanding. The shares deemed outstanding is based upon 3,855,656,182 shares of Common Stock outstanding as of March 4, 2009, which information was provided by the Issuer, together with the 2,586,976,761 shares of Common Stock issuable upon conversion of the B-1 Preferred Stock."

As you can see, it states "as of March 4th." This is the snap shot date this form was filed with. It "represents" 40.15% of the common stock. This isn't really that confusing to me and strange it has surfaced as an issue at this time. All from some "unheard quote" that no one can verify at a stockholder meeting that was not available to hear if you didn't go to it. So you have facts from the filings or you can believe hearsay and faulty logic. Choice is yours entirely. I am simply presenting the facts here, no opinions, no "hearsay."

Let's see how Liberty shows the ownership levels of Sirius XM. If it is a share count, it would be listed as such on their filings. In fact it is not listed that way and is listed year in and year out as a flat 40% holding on their own filings further strengthening this position of being accurate. Here is in Liberty's own words again. This is from their latest filing, their own 10Q form.

Investments in Affiliates Accounted for Using the Equity Method

Liberty has various investments accounted for using the equity method. The following table includes Liberty's carrying amount and percentage ownership of the more significant investments in affiliates at March 31, 2011 and the carrying amount at December 31, 2010:

March 31, 2011 December 31, 2010
Percentage
ownership
Carrying
amount
Carrying
amount
dollar amounts in millions
Interactive Group
Expedia 25 % 721 710
Other various 262 239
Capital Group
SIRIUS XM 40 %

Now let us take a look at what could adjust the share count. There is a Certificate of Designation diction that has to be looked at now. We know the count is a variable. We know why that amount of shares was registered to the SEC in March of 09. Now we must see if a buyback was specifically mentioned as something that would NOT affect this count. As a buyback is under normal business procedures and could not be voted down with Liberty's votes on the board, as that would result in a vote "against" the benefit of the stockholder and open up to even more lawsuits. So there is no way Liberty can prevent a buyback. There is also nothing in the Investment Agreement, which expires by the way in less than 1 year from now in March 2012, that would allow Liberty to stop a share buyback. What Liberty did do however is protect there ownership percentage from dilution. Let's us read the diction covering this scenario.

The only agreement that is needed now is the Entry Into Definitive Agreement filed March 6th, 2009. This covers the preferred share agreement with Sirius XM and holds all the rules of conversion. It clearly states that an "adjustment event" would occur if the amount of outstanding shares would change. Read what it says here closely.

"Adjustment of Shares Numbers . If, after the Issue Date, there is a subdivision, split, stock dividend, combination, reclassification or similar event ("Adjustment Event") with respect to any shares of Series B-1 Preferred Stock or Series B-2 Preferred Stock, then upon the effectiveness of such Adjustment Event, the reference in Section 12 to a specific number of such shares shall automatically be adjusted proportionately, so that the Holders of such shares will retain the same rights under Section 12 immediately following the effectiveness of such Adjustment Event as they did immediately prior thereto."

This clearly means that any change and Liberty would have to file an amended 13D when it happened. Watch for this. The form would issue a new share count that would be determined to be approximately 40% of the company. A buyback would most certainly be an "adjustment event." It would fall under any combination, subdivision, or similar event. Mel has stated time and time again how buying back shares would be a way to add value to the common.

Now what Mel may have stated is that any adjustment to the outstanding share count would have to be considered if a change of control would occur if a buyback created it. Meaning a 40% and a 5% or more owner being triggered by the increase in institutional ownership percentages due to a reduction in outstanding shares due to a buyback. If a 40% owner combines with another owner to at a 10% level, it would trigger a change of control. But this would require a very large buyback to be a factor and something Sirius XM will have to watch closely. As of right now however, Sirius XM has no 5% owners. Capital World is closest with nearly a 4% total right now.

Of course Liberty's percentage would increase if a buyback occured AFTER a conversion to common by Liberty. They would have access to the appropriate number of board seats of course, but would lose all preferred share rights. I do not expect Liberty to convert their shares however. Also Mel has a nice parachute clause in his contract should a change of control occur and something Liberty has to be wary of. Mel has stated he will only work for himself and never someone else again. If Liberty gains control, Mel would be a rich man, would trigger his bonus shares, and Mel may no longer decide to stay with the company. I believe there is a reason Mel is pushing the buyback plan (as a way to get Liberty to make their ultimate intentions known) and has his contract expiring in 2012 with a nice change of control clause to protect his mangement position.

As you can see from the filings a buyback would not increase Liberty's ownership percentages but the share amount on the filed 13D can change. This is not an increase in ownership however. If Sirius XM reduces or increases their outstanding share count enough to trigger a new 13D filing you will see this as fact once and for all if you still need convincing. For the author's case to be valid, that number would have to be "set in stone" as stated in the article in question. As you can see it is clearly a variable number and it is absolutely not set in stone.

I appreciate any and all feedback on this issue.

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Disclosure: Currently Holds Calls (mostly) and Puts on SIRI

Source: Sirius XM Share Buyback Plan Would Not Increase Liberty's Percentage