It certainly did not take long for Liberty Media (LMCA) to respond to the opposition letter Sirius XM (SIRI) sent to the FCC. Before moving on, it would be prudent to step back and review what has transpired to date.
- February 17, 2009 - Sirius XM and Liberty Media enter into an agreement whereby Liberty gains 40% control of Sirius XM via preferred shares. The agreement contains many provisions including standstill restrictions prohibiting Liberty from going over a 49.9% in the company for a three year period.
- March 6, 2012 - The three year term of the agreement expires, leaving Liberty Media free to act as they desire with regard to their stake in Sirius XM Radio.
- March 2012 - Liberty requests that Sirius XM provide the password for electronic filing with the FCC and Sirius refuses to supply the password
- March 2012 - Liberty Media seeks alternate route to file for De Facto control of Sirius XM
- March 2012 - Sirius XM files motion to deny petition to the FCC citing procedural defects in the Liberty foiling including the fact that the filing was not made electronically
- April 12, 2012 - Liberty Media responds to the Sirius XM's petition to deny with a filing of their own
In their filing Liberty Media outlines in a concise manner that the application for De facto control should stand and that all of Sirius XM's arguments against the Liberty action are either incorrect, moot, or caused by Sirius XM's own doing. In actuality the Liberty filing makes the Sirius XM petition seem like a desperate attempt to stop the inevitable with trickery and doublespeak.
When Liberty made their first filing there were several erroneous reports that saw the filing as Liberty trying to "sneak in" and take over control of the company without outlaying any additional cash. Some reports even contended that because of the filing Liberty may already have increased their stake to over 50%. It was a classic case of instant reaction without taking the time to digest what was actually happening.
The fact was that while Liberty was seeking the transfer of licenses because they argue that they already have De Facto control, they were not moving to take over the company.
Before Liberty can take control of Sirius XM they need the permission of the FCC to control the licenses. In a prudent move Liberty was essentially seeking permission from the FCC to hold the licenses that allow satellite radio to broadcast. If such transfer could happen without a 50% stake then that would be quite fine for Liberty and the process could move along faster. However, if the FCC deemed that Liberty needed "actual" control, then the company would know that and could take appropriate actions knowing that their eventual application for transfer of licenses would be approved.
Regardless of the debate about de facto control, the end result would likely be the same. Liberty may well move to gain a majority stake and then conduct a Reverse Morris Trust to make their investment in Sirius XM as tax-friendly as possible.
In reviewing the filings, it can clearly be seen that Liberty has a solid stance in actually already having De facto control. They carry 5 out of 13 board seats, can use their voting power to exert control (given that few shareholders actually vote), can call a shareholder vote, can seek to approve even more board members (and get them onto the board with their voting power) to gain further control, and even go public with proposals regarding the company.
In contrast, Sirius XM's filing looks more and more like a last ditch effort to unwind a deal that was struck when times were dire. Comparing the two filings demonstrates the clear winner of the debate. While instant de facto control may not be the result, the permission needed is not likely to be denied. This will pave the way for Liberty Media to make the moves they desire.
In my mind, the key here for investors is to read the filings directly. Included in the filings is the original investment agreement between the two parties. In reading this document it is quite clear that Liberty Media carries tremendous rights over the direction of Sirius XM Satellite Radio. Investors need to understand that dynamic. Especially important is that Liberty is already at 40% and controls a lot of debt.
We are not far away from the Sirius XM annual meeting at this point. If the relationship between Sirius XM and Liberty is strained, it could be quite possible that Liberty reaches out to take effective control sooner than some may think. We do have the advantage of the FCC process to help keep us appraised of the situation, but the exact timing is still up in the air.
If you are betting on this situation by buying shares, LMCA stock may be the way to go.