The Sirius XM Board Sends A Message To Liberty: No

| About: Sirius XM (SIRI)

Sirius XM (SIRI) has fired back a very lengthy petition to Liberty Media (LMCA) disputing its right to file for de facto control of the satellite radio company. The document filed with the FCC on Friday "throws everything at Liberty including the kitchen sink". It is absolutely cutting edge brilliant. And it makes me confident that the FCC will not have a choice other than to "dismiss or deny" Liberty's Application to take control of Sirius.

As I mentioned in an article that I wrote just hours after the Liberty Application was publicly filed, this appears to be an attempt by Liberty to execute a hostile takeover using the FCC as a pawn in the process.

SIRI vs. S&P 500

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Liberty alleges in the application that it has received control of Sirius because the expiration of the 2009 agreement which kept Liberty from increasing its stake has now expired. There is just one problem. Liberty wants the FCC to give it control even though it only owns 40% of the company. Liberty provided precedent with past FCC approvals of minority stockholders in the same situation.

That alone is enough to leave the average stockholder shaking in his/her boots. In other words, they would take control without paying anything for that control. However, on Friday the market reacted favorably to the possible buyout news and the stock shot up eleven cents. But it may be that the stock went up due to this Sirius XM petition that was filed the same day.

In it Sirius states that the difference in the cases Liberty used as precedent is that both parties were in agreement. However, that is not the case here:

The fact that Liberty Media was unable to secure signatures and information from the purported transferor of the FCC licenses provides clear evidence that both a majority of Sirius XM's board of directors (the Sirius XM Board) and its management dispute Liberty's assertion that expiration of certain provisions of the investment agreement (the Investment Agreement) dated February 17, 2009 between Liberty and Sirius results in a de facto transfer of control of the company.

It goes on to say that the FCC is not the "correct forum" to determine laws that affect corporate governance. And it should not be involved in such a dispute. The expiration of the 2009 agreement only allows Liberty to "take actions to acquire control" of Sirius (such as) through the purchase of additional shares of the company. At that time the Commission might act on the facts as they exist, not on speculation about the future.

The main reason that Sirius believes the Liberty application should be thrown out is based on several procedural defects:

1. Liberty failed to submit each component of the application electronically.

2. Liberty used the wrong form when attempting to file electronically.

3. Liberty failed to include signatures (from Sirius) for the licenses and the "purported transfer" of Sirius XM.

According to Sirius any one of these alone would be a reason to deny an application. Liberty said in their Application that it could not file electronically because Sirius would not provide the password to do so. Really? The Sirius petition answered with:

This is the equivalent of trying to cash an unsigned check and explaining the lack of a signature by saying nothing more than "the account holder refuses to sign it".

The Sirius XM Board discussed the application by Liberty and told company management not to participate or help Liberty in order to protect Sirius shareholders. The Board then authorized the filing of this petition. So both parties are clearly not in agreement. The Sirius Board is comprised of 13 members, 5 of which are appointed by Liberty. And two of the "Liberty 5" must be independent of Liberty.

I honestly can not believe the Liberty application. It is unprofessional, messy, and has mistakes. For instance, it cites the fact that no one owns more than 5% of the common stock. Was this a typo? Or do they really not know that Wellington Management owns over 5%. There has been wide speculation that Liberty might strike a deal with another large owner(s) to get over 50%. But the "over 50%" is just window dressing by Liberty. What they really want is to own 80% of Sirius to take advantage of the $7.8 billion plus in NOLS that Sirius currently owns.

As the petition states Liberty does not take part in the "day to day" operations of Sirius. And if this example of "How to File a Really Stupid Application with the FCC" is an example of how to run things, then shareholders had better hope that Liberty does not get involved in those operations even if they own 80%. As I said in my other article, I think the Liberty application is an insult to the FCC.

And if there was the slightest possibility that the FCC would consider such a thing, the petition used "Liberty's own words" to put the final nail in the coffin. It seems that in its own 10-k which was filed on February 23, 2012 the company wrote that it does not want to be involved in the "day-to-day" operations of their minority holdings:

We do not have the right to manage the businesses or affairs of any of our business affiliates (generally those companies in which we have less than a majority voting stake.) Including Sirius XM Radio, Barnes and Noble, and Live Nation. Rather we prefer to exercise our rights on the various Boards...

It's really hard to establish credibility when you write something like that a couple weeks before trying to take control of a company and its daily operations while maintaining a minority share of that company. No, I think that if Liberty wants control they are going to have to buy that control with enough money that everyone can agree on. And as a shareholder that makes me very comfortable. As I have said more times than I can count, "My money is on Mel". This may be his Grand Slam.

Disclosure: I am long SIRI.