Earlier this week I wrote an article exploring the possibility of Liberty Media (NASDAQ:LMCA) being able to contract the purchase of shares thereby being able to tie up enough shares to get above the 50% threshold. The article, Sirius XM Investors Eying Move By Liberty May Be Blindsided, generated a lot of feedback. So much so that a follow-up piece seemed in order.
One thing that can be said about Sirius XM (NASDAQ:SIRI) investors is that they can be quite passionate about the company and its stock. Before moving into deeper discussion about the issues surrounding Liberty Media a brief review might be in order as there seemed to be some confusion as to certain dates and what Liberty can and can not do.
- Liberty already has the right to own up to 49.9% of Sirius stock without board approval or any restriction. Should they increase their stake they would have to file SEC notification. A way around this is if Liberty simply contracts to purchase shares at a future date. By taking the second option Liberty could tie up the shares they desire without any notification.
- After March 6, 2012 Liberty can do whatever they want and no longer have any restrictions with regard to percentage ownership. They could simply buy shares and file the required SEC documents, or they could contract shares and avoid filing whilst gaining control of the shares they want.
Comments on the previous article were quite good with some great back and forth discussion. However, sometimes investors tend to get hung up in the minutia instead of looking at the overall picture from more of a birds eye view. A few of the issues that arose that deserve more discussion include:
Liberty Would Need Just Under 700 Million Shares And The Institutional Ownership Is Not High Enough For Malone To Make These Contracts
First things first. Depending on what Liberty is willing to pay, they certainly could make such deals. The possibilities are endless. However, realistically speaking, the likelihood of Liberty cutting contracts with 5 or 6 major holders is pretty slim. That being said, they could cut deals with two or three in order to get themselves into a better position. The theory here is that Liberty would love to obtain these shares for as cheap as they can. If they got 300 million out of the approximately 700 million needed, they are well on their way.
One natural question might be this. If an institution bought Sirius XM stock, why would they want to sell it?
Just as there are many retail investors who might have bought Sirius XM in anticipation of a move by Liberty, institutions can do the same thing. The difference is that an institution or hedge fund can do it on a much larger scale. It is even quite possible that some of these institutions or hedge funds have been active in reaching out to Liberty to let them know they are willing to deal. The main reason to sell is to make money. If Liberty offers a guaranteed price point at a premium, then it could be a natural move.
Another consideration is this. What if Liberty does not use cash, but instead offers up a stock deal? If a large shareholder is still interested in being invested in SIRI, they could remain in that status by taking Liberty shares in trade for Sirius XM shares. This would allow an institution to remain invested in satellite radio while at the same time allowing Liberty to garner enough shares to take a controlling interest and do a possible Reverse Morris Trust.
If Liberty Acted Now They Would Need To Make A tender Offer For The entire Company
This assumption is not 100% true. Liberty only needs to make a tender offer if they want to go above the 49.9% threshold. Liberty could do plenty right now if they so desired, and given the possibility of tying up shares via contract, could already have a big chunk of what they need. If we assume for a moment that Liberty has already contracted enough to get to 49.9%, then once March 6th passes they could simply do an open market purchase to take them over the top. With the 10 day window, all of this could happen without anyone being the wiser. By example...Assume Liberty has contracts to take them to 49.9% in place and they have agreed to close that transaction on March 15th. Between March 6th and March 15th they could buy additional shares at their own pace so that by the time the SEC filing hits on March 16th they could announce that they have obtained enough shares to gain control.
The additional factor that some don't consider regarding a tender offer is that Liberty merely needs to make a tender offer. They do not need all shareholders to accept it, but rather enough to take them over the top. Personally I do not see the tender offer situation happening as March 6th is right around the corner and there is no real rush here.
Liberty Will Buy On The Open Market, drive The Price Up, And It Wont Matter Because Their Own 40% Stake will Rise As Well
I do not really see this happening. I know many investors want this to happen, as it would appreciate the price of the stock, but realistically speaking why would Liberty want to make this deal more expensive? While Liberty does have a lot of cash, they do not have an unlimited supply. Liberty has a responsibility to their shareholders and an open market purchase of any substantial size would artificially boost the share price. Paying too much of a premium is not in the best interest of Liberty shareholders in my opinion.
Pre-Arranged Deals Will Bring Lawsuits
There are already lawsuits and in America these days there will always be lawsuits. Why would a pre-arranged deal generate a lawsuit and an open market purchase would not. Liberty has the right to buy or sell shares as they see fit. If they can broker a deal it is their prerogative. Legally speaking (in this non-lawyers opinion), the risk of a lawsuit does not materially increase based on whether Liberty buys on the open market or in a private deal.
In summary, I think the most important lesson here is that Sirius XM investors need to look at this issue through the eyes of Liberty rather than through the eyes of Sirius XM. Liberty is very much in the drivers seat and has many avenues at their disposal. With all of this being said, there is no guarantee that any of this happens at all, nor is there a material way to gauge when this might happen. We speak to March 6th because that is the day much of this could be real. Liberty will certainly do something. It is now a guessing game to figure out how and when.
Disclosure: I am long SIRI.
Additional disclosure: I have no position in LMCA