Liberty Media (NASDAQ:LMCA) is continuing their path toward control of Sirius XM Satellite Radio (NASDAQ:SIRI) with the purchase of an additional 60,350,000 shares of SIRI at a price of just under $2.13. This latest development is in addition to the 302,198,700 notional shares that Liberty Media has contracted with a forward purchase agreement. The moves would take the Liberty ownership stake above 46%. Ironically, the 46% level is a level that would equate to 6 of the 13 board seats at Sirius XM. Liberty currently holds 5 of the 13 seats.
Investors in both Liberty Media and Sirius XM certainly have a ton of questions at this point, but the big picture in all of this is that Liberty is marching forward and adding shares at a clip that may make a change of control happen sooner than some anticipate.
Along with the SEC filing that revealed the purchase of some 60 million shares on Monday and Tuesday, we also learned some additional detail about the forward purchase agreement. This is where many investors may get some answers as to why a party would agree to sell shares at $2.15.
Liberty entered into an agreement on December 30th of 2011 for the purchase of up to 315,000,000 notional shares of Sirius XM stock with an unrelated third party. A notional share is not physical stock, but rather a theoretical share that carries the financial benefits of the actual stock. At the time the deal was struck the Sirius XM share price was in the $1.80s.
Unknown is whether this party already owned a substantial stake at even lower prices. Liberty essentially agreed to pay $2.15 at a future date when the stock was trading about $0.30 lower. Liberty was able to do this prior to the March 6th expiration of their investment agreement with Sirius XM because the initial agreement allowed for Liberty to take their stake to 49.9% without any further notification to the company.
At this point many may be wondering why there was no disclosure on December 30th of 2011. In my opinion the answer is actually quite simple. While a deal was indeed struck, part of the deal was contingent upon the unrelated party completing their hedge position. The unrelated part did not complete their hedge position until May 7, 2012. Once that happened the contract could be finalized and announced. While some may cry foul about this, technically speaking (and in my opinion) Liberty Media was within the letter of the law, and very shrewd about how the deal was structured.
The next shrewd move by Liberty came with the timing of the announcement. The company announced that they were able to contract for 302 million shares at a price below the recent trading of the equity. This sent the stock price lower, and Liberty expended some of their own cash to buy up an additional 60 million shares. Any premiums Sirius XM investors have been looking for have, until this point, been non-existent. In fact, given that Liberty Media accounted for a substantial amount of volume traded in the last two days with the stock price not sky-rocketing, should be a clue to savvy investors that a substantial premium is not in the cards.
Having written about this issue for quite some time, I have found many Sirius XM investors that disliked my stance that Liberty Media holds all of the cards in this corporate game. I have been looking at this issue from what I consider a very pragmatic and practical perspective. This is why I have been so stern in my stance. The endgame was written into this script back in 2009 when Sirius XM inked their deal with Liberty Media.
Unfortunately it has taken some hard business lessons for many investors to realize this. At the drop of a hat during the last few days Liberty Media has done open market purchases that elevated their stake even further and the stock price barely responded.
Some Issues To Consider
- For investors insisting that a stock buyback was in the cards...forget about it. At least until such a time that Liberty takes a majority stake in the company. At this point Sirius XM is not going to boost Liberty Media over the top by buying back shares.
- Liberty Media now holds even more cards than they did before and their negotiating stance has increased both with Sirius XM as well as with the FCC in their quest for de facto control.
- Sirius XM management needs to be getting Liberty's Malone on the phone now to try to hammer out a deal that works for both parties or Liberty Media may be able to waltz into control at a substantial discount.
- You can bet that other major institutions are calling on Liberty and trying to negotiate large blocks of shares.
- The Sirius XM Annual Meeting happens on May 22nd, only a couple of weeks away. Sirius XM needs to do some substantial damage control prior to that meeting.
- As a large shareholder Liberty would be within their rights to call a special meeting and even make some drastic proposals for shareholders to consider.
- Liberty now effectively has 2,955,392,127 shares and a 46.2% stake in Sirius XM.
- Liberty has already paid $230 million on the forward purchase agreement for the 302 million shares. Liberty is SUBSTANTIALLY on the hook.
- Liberty has announced that they intend to take a physical settlement on the forward purchase contract regarding the 302 million shares.
Liberty Media is in the driver's seat at this point even more than before. Sirius XM can and should negotiate in order to preserve value for existing shareholders. At this point it appears that that value will not be at a very substantial premium. The pressure is on.
Disclosure: I am long SIRI.
Additional disclosure: I have no position in LMCA.