Liberty Media Cannot Go Over 49.9% Ownership Of Sirius XM Without FCC Approval

May.23.12 | About: Sirius XM (SIRI)

For those that follow this equity closely, this article may be a bit of a review. However, after attending the Sirius XM (NASDAQ:SIRI) shareholder meeting yesterday, it became apparent that there are still many questions out there regarding Liberty Media (NASDAQ:LMCA), the Federal Communications Commission (FCC), and control of Sirius XM.

I get the sense that much of the confusion surrounds the Liberty media request for de facto control status of Sirius XM earlier this year. Essentially, what Liberty media was trying to do was gain FCC approval for being in control of the Sirius XM licenses. If the FCC would have granted de facto control, then Liberty Media would essentially have gained the required permission of the agency to be in control of Sirius XM.

What many do not seem to understand is that the FCC actually has a great deal of control over any entity gaining over 50% of a company that has licenses with the agency. This protection is in place to ensure that operators and broadcasters are responsible, as well as to ensure that the media is not controlled too much by any one entity. If Sirius XM were not under the authority of the FCC, there would be nothing to stop a suitor from simply gaining a controlling interest.

Thus, what we have is a stop sign of sorts at the 49.9% level. In order to go over the top and take actual control of Sirius XM, Liberty Media would need to get to that 49% level and then cut a deal for more shares to take it over 50%. At that point, Liberty Media would go to the FCC and say that it has 49% of the company and a deal in place to go over 50% should the FCC approve.

Functionally, there is no real reason why the FCC would deny such an application, and in this case it would be more of a formality than anything else. For shareholders though, there is a small silver lining.

While technically speaking Liberty Media only needs 50% of the company to nominate its own board slate and take control, the reality differs slightly. Because of the existence of the employee stock option plan, warrants, and options, the share count could dilute slightly and take what was once a 50% holder down below that magical threshold. For this reason Liberty media would need to build in a buffer to something like 52% to 54% to gain and keep that control.

Thus, while most think that Liberty only needs another 350 million shares to gain control, that number should actually be more along the lines of 450 to 500 million shares. Getting those shares may not be as easy as the forward contract and open market purchases were. Of course, the existence of yet another forward purchase contract may exist. We, as investors, may get some additional facts when Liberty appeals the initial FCC decision with more detail.

Simply stated, Liberty Media still needs to deal with the FCC in order to make its moves. This could provide savvy investors with enough of a heads up to plan accordingly.

Disclosure: I am long SIRI.

Additional disclosure: I have no position in LMCA