SiriusXM: Why Mel Karmazin Stands In The Way Of A Liberty Media Buyout

 |  Includes: LMCA, P, SIRI
by: Investment Underground

J.M. Darling

Financial airwaves are buzzing over speculation that Liberty Media Corporation (NASDAQ:LMCA) may increase its 40% stake in satellite radio company SiriusXM (NASDAQ:SIRI). Fueled by the recent decision to change Liberty Media’s tracking stock structure by combining Liberty Starz [LSTAV, (LSTZA)] and Liberty Capital LCAPA, (LCAPB)], the media empire can now be more fairly valued and future acquisitions may be favorable.

In March 2009, Liberty Media acquired its stake in the satellite radio company with a $530 million loan deal to shield SiriusXM from bankruptcy. The deal proved advantageous with SiriusXM improving financial strength and surprising analysts with better-than-expected results for third-quarter 2011.

Net income at $104 million or 2 cents a share was better than the expected 1 cent a share and was up 54% from a year ago, while revenue rose 6 percent to $763 million. Sirius XM Radio Inc. says its subscriber base grew 7 percent to end the quarter at 21.3 million, putting its paying customer numbers on par with Comcast.

At current valuations with over 6.5 billion shares outstanding, Liberty Media already owns a substantial piece of the satellite radio giant. Taking controlling interest at 49.9% now or before March 2012 is an attractive option for the media conglomerate, especially given SiriusXM’s solid rebound from the financial brink, favorable tax implications from carry over losses, and the structure of the original Liberty and Sirius deal. Despite liquidity and cash flow improvements, an outright takeover of SiriusXM does dial up some static.

Competitors like Pandora (NYSE:P), a personalized radio service, and Clear Channel’s new iHeart Radio terrestrial radio streaming, are proving to be fierce competitors to SiriusXM. Pandora is being added to Ford’s (NYSE:F) new 2012 truck line while Clear Channel has seen more than 65 million downloads of its iHeart Radio mobile app. SiriusXM’s planned increase in subscriber fees scheduled for 2012 may drive listeners to these alternate providers.

While Liberty executives have been tight-lipped regarding takeover talk, well known radio czar, Mel Karmazin who is the CEO and director of SiriusXM has been publicly announcing his thoughts on Liberty’s plans to take controlling interest in the satellite radio company. Speaking in New York, at the Reuters Global Media Summit, Karmazin said that Liberty Chairman Malone and CEO Greg Maffei should be very happy with the deal. "They could call me and say 'Mel, I love the company so much, I want to buy the whole company,'" he said. "They haven't called and I don't suspect they will." Karmazin’s contract expires at the end of 2012 and if his past history is any guide, he won’t stay around to run the company for Liberty Media if he gets relegated to the number two guy in a takeover.

Keeping Karmazin happy at the helm of SiriusXM could be more beneficial for Liberty than exercising its options for full takeover. "We will have nearly $1.5 billion of liquidity at our disposal by the end of 2012," CEO Mel Karmazin said during SiriusXM’s quarterly conference call. "We will have the flexibility to use this liquidity to grow our business, ensure a low cost of debt, make acquisitions, and return capital to shareholders."

Mel Karmazin may be better for Liberty Media by continuing to manage its stake in SiriusXM as the CEO rather than having him seek competing opportunities.

Whether Liberty Media goes all the way to take over its rescued satellite radio company or continues to maintain a comfortable status quo in order to be flexible for other multi media opportunities remains a debatable topic. With wide ranging content from The Muppets to Ozzie Osbourne across all platforms on a subscriber basis, both companies are winners in the broadcast space. Stay tuned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.