Today Liberty Media (LMCA) announced that it would purchase 302 million shares of Sirius XM Radio (SIRI) in a forward agreement which will close early in Q3 of this year for $2.15 a share. The company also announced on its Conference Call this morning that it will re-file its application with the FCC to get control of Sirius within thirty days. By then Liberty expects to have information for the FCC about its plans to establish a large enough ownership in Sirius that the application will be approved, according to CEO Greg Maffei.
Maffei refused to disclose who their "counter partner" is in the $650 million sale, but disclosed that the company is "on the hook financially" to buy the shares. And the $2.15 price is "locked in". He said he did not know if the shares were purchased or hedged. And he went on to say, "We are as enthused about this (Sirius) as anything thing we own ... as anything in the marketplace."
Sirius shares fell to $2.07 after the announcement; however, the entire market was down.
The end goal for Liberty is to own 80% of the company. This would give it control of the over $8 billion in NOLS (Net Operating Losses) that Sirius XM owns:
By buying up more of Sirius equity - getting Liberty to the 80% ownership threshold - Liberty may be able to tap into Sirius' NOLs. And by accelerating the use of those NOLs, the value of the tax asset may increase by almost $1 billion.
How it would be accomplished remains a mystery. Maffei said there are basically three options:
(1) Sirius could be spun away into a separate Liberty holding company, (2) turned into a Reverse Morris Trust (RMT), as with DIRECTV (DTV), or (3) "Go into control" by buying enough stock to own over 51% of the company, but leave it as a separate corporate entity. He did not elaborate as to which option would be best for their shareholders.
The fact that Liberty will end up with 45.2% of Sirius "as converted" leads me to believe that a share buyback is imminent. If not, they would have made arrangements to buy 51%. The board will meet on May 22, and could approve the buyback then. This is well within the thirty day limit that Liberty has to "file a motion to reconsider" with the FCC. And by having the option to buy shares at $2.15 in September, they are protected from the price increase that the buyback will cause.
As I said in one of my articles about buybacks, the share price will go up as the share dilution shrinks. And if Liberty does not participate, it will make its slice of the pie bigger. Based on extremely rounded numbers (which should not be used to buy the company) the common shares would need to be cut by about 625 million to give Liberty over 50% of Sirius. The way I get this number is considering that there are 6.5 billion outstanding shares (again I know that this is rounded due to options etc, etc). If Liberty can convert its stake to 45.2%, that leaves 54.8% of common shares left.
Liberty would have 2.938 billion shares, and there would be 3.562 billion common shares left. These would have to be reduced to 2.938 billion to give Liberty 50%. So 3.562 - 2.938 = .624 billion or 624 million shares. Because Sirius is expected to have up to $1.5 billion in cash by the end of the year, they could pay up to $2.40 a share for 625 million shares. And as I have said numerous times this will not only help Liberty, but it will increase the share price. Based on today's numbers, with a market cap of $14 billion (2.15 x 6.5) the new share price would be $14 billion divided by 5.876 billion shares, which is $2.38 a share based on today's market cap.
This is the most likely scenario. If Liberty files a motion to reconsider within the 30 day time limit the company should retain its "place in line" for approval. This allows time for a board approval of the buyback, and their forward purchase in September to close. In my opinion, Sirius will be wrapped in a pretty little Liberty package by October. For those of you who hate this idea, it doesn't matter now. You will either sell or stick with it for the higher share price. As Maffei said, "We have the ability to have a lot of influence on the board members". I personally think this is a done deal.
Why is Liberty so desperate to get Sirius? As I have said, it is the NOLS and the fact that Sirius is a winner. But something else came out of the conference call. A future goal Liberty has is to package the Nook and Sirius (among other things) together. As one analyst remarked, it could all be on the school tablets as part of Barnes & Noble's (BKS) new partnership with Microsoft (MSFT). In a recent article I mentioned that Sirius can also send video signals with their satellite spectrum. Since Liberty already owns around 17% of B&N, this would be doable with controlling interest in Sirius. Liberty management is very focused on the Sirius XM research going on at the Boca Raton Tech Center, and they are very impressed with the satellite based capabilities. "This is very attractive on every platform," said Maffei.
So if you are a Sirius Bull who did not get mad and sell all of your stock today, there is still a very bright future for Sirius. If you got so mad that you broke your laptop, I am truly sorry. I am not sure which of the three options Liberty will go with yet. Of course I am voting for option number 3. But nothing will happen before September. Except possibly the buyback. So if you do not own shares in this cash cow, this would be a good entry point. Even though it appears bleak right now due to the share price, "the sky is the limit now"!
Disclosure: I am long SIRI.