Sirius XM's (SIRI) largest stockholder, Liberty Media (LMCA), appears to be laying the groundwork for a hostile takeover of the satellite radio company. Liberty has filed paperwork with the Federal Communications Commission (FCC) that seems to indicate that it wants to take control of Sirius XM's licenses.
On March 20, Liberty filed three Form 312 documents, which would allow the transfer of Sirius' earth station licenses, along with XM Radio's earth station licenses, and terrestrial repeater authorization to it with the FCC, reports Streetinsider. If successful, this move would give Liberty the legal right to takeover Sirius' radio network.
Liberty actually admits that it wants to takeover Sirius XM in the six-page application it filed with the FCC, Seeking Alpha noted. The application even contains the statement: "Consequently, Liberty Media is filing this application to obtain commission consent to the transfer of de facto control of Sirius from the current shareholders of Sirius to Liberty Media."
This looks like Liberty is launching a classic hostile takeover bid. The bid would have to be hostile, because the Denver-based company only owns around 40% of Sirius. It would have to buy another 10% of the company from somebody, which could benefit current investors.
The interesting question will be what will happen if Sirius' current management decides to fight Liberty boss John Malone. Malone has a lot more money and resources on his side. Or he could simply buy up Sirius' stock. Malone certainly has the money to buy up all of Sirius' stock if he wants to.
There could be some real stumbling blocks in Malone's way though. The FCC could block the deal and Sirius could sue Liberty. There was apparently some sort of agreement signed between the two companies that limited Liberty's role in Sirius when Malone bailed out Sirius in 2009.
One interesting point here is that Malone could be planning to add Sirius' radio offerings to his existing cable TV networks. He could also be planning to use Sirius to distribute some of the programming offered by some of his other holdings such as Discovery Communications.
Malone paid $530 million for his stake in Sirius in 2009. At the time, he beat his rival and neighbor Charley Ergen, the owner of Dish Network (DISH), who was also trying to buy up Sirius. Interestingly, Liberty's headquarters and Dish Network's headquarters are within sight of each other in the same office park south of Denver.
One win-win situation for investors would be if Ergen decides to make another play for Sirius. Sirius would be a good fit with Dish Network's existing satellite television programming. If Ergen tries for Sirius again, shareholders might see higher prices.
Sirius suing music industry
Malone's move comes at an interesting time, because Sirius has also started what could be a nasty and expensive legal battle with the music industry. On March 28, it filed an antitrust suit against two music industry groups, the American Association of Independent Music, and the SoundExchange, in federal court in Manhattan.
The suit alleges that those two organizations and other music industry groups pressured record labels not to sign special licensing deals Sirius tried to offer last year. Sirius was trying to get around the SoundExchange, a music industry group that collects royalties on digitally distributed music, and effectively create a free market for music.
The idea behind this suit and the special licensing deals is to cut the price that Sirius currently pays for music. Under the present SoundExchange rules, Sirius pays an 8% royalty on every song. If it could get around the Exchange, Sirius could negotiate a lower rate on popular music. It could also set up special deals, such as offering free songs.
Current music industry practices are an industry-wide conspiracy to prevent digital content distributors like Sirius from doing just that, the suit alleges. The music industry has long opposed digital distribution of programming out of the fear that music might be distributed for free.
Sirius could be shooting itself in the foot with this lawsuit. If it succeeds, it will open the door for its competitors, including Apple (AAPL), the owner of iTunes, and Cumulus (CMLS), to make similar deals with music producers. That could lead to sweet hold deals and exclusive deals to distribute songs.
There is also the possibility that Sirius could create direct contracts with musicians themselves. Part of the thinking here might be that Sirius could sign exclusive agreements with big stars like Madonna or Beyonce, or even major bands, to be exclusive radio distributors of their songs. It is doubtful that musical acts would want to limit their access to the markets in this way, but it is possible.
Can Sirius Compete with Apple and Google?
This also brings us to Sirius' biggest competitor in the music industry, namely Apple. Part of the reason why Apple's stock has been trading at more than $600 a share is due to money machine known as iTunes, which digitally distributes music to iPods and iPhones. Since people can carry those gadgets anywhere, that puts Apple in direct competition with Sirius.
Sirius probably doesn't have the resources to compete with Apple and iTunes. Even John Malone might lack the resources to fight Apple. An even scarier possibility would be Apple making direct deals with musicians and other content providers to sell songs and programs over its network.
It goes without saying that behind Apple, Sirius has an even bigger, scarier, and more aggressive competitor in the form of Google (GOOG). Google has recently changed its App Marketplace to Google Play. A quick look at Google Play shows that it is designed to market music and entertainment programming.
Google's target here is obviously iTunes, but Google Play could also seriously hurt Sirius. Google Play is distributed over Google's free Android operating system, and as anybody who's ever visited his local phone store knows, Android devices are cheaper than Apple devices. A huge advantage that Google has is that Android is open-faced and free, you can put it on almost any device. How is Sirius supposed to compete against that?
We have to ask ourselves why would anybody pay for Sirius if they can download all the music they want from iTunes and Google Play? After all, most modern cars are designed to let you hook your iPod or MP3 player directly into the sound system so you can play your downloads. A major advantage that both Google and Apple have is that going to iTunes or Google Play is free. You only pay for the music there if you actually want it.
This of course doesn't count all the people who are using various scams and programs to get free music. The average cheapskate can locate several programs online that will let them get all the songs they want free. Even though the music industry keeps suing these operations, they keep popping up. One problem the music industry faces is that a lot of the programmers that cook up these freebies are located in places like Russia, so they can't be sued in a US court.
I have to ask an important question here: does Sirius actually have a future? John Malone seems to think so, but I have hard time seeing how he is going to be able to compete with Apple and Google.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.