Sirius XM: Is 46.2% The New 50 Percent?

May.25.12 | About: Sirius XM (SIRI)

During SiriusXM's (NASDAQ:SIRI) Q1 earnings conference call, CEO Mel Karmazin was asked about Liberty Media (NASDAQ:LMCA) seeking de facto control of the Sirius FCC licenses. Part of his response was:

There are 13 members of our Board, and Liberty has 5 participants of that 13. Liberty's 40% is significant influence but not control. As we said in our filings, 40 is not the new 50.

...So we believe that the FCC will conclude based on their precedent that a 40% shareholder, even one with influence, is not in de facto control, and that's how they will rule, but we're waiting to hear from them.

Karmazin was proven to be correct shortly after making that statement when on May 4th the FCC dismissed Liberty's petition. Liberty has said they will file an appeal within the 30 day window. Are there reasonable grounds for an appeal? It would certainly seem so.

In its letter dismissing the Liberty petition, the FCC wrote the following:

We find Liberty Media's applications to be unacceptable for filing because they are defective with respect to "execution" and "other matters of a formal character." Specifically, Liberty Media was unable to obtain the passwords, signatures, and other necessary information from Sirius to properly file an electronic transfer of control application.

The rejection was based on a failure to obtain passwords and file the petition electronically. Liberty had asked that the electronic filing requirement be waived since it had significant controls and could easily take control of the board if it were to convert its preferred shares to common stock. The FCC letter continued:

Furthermore, we conclude that a waiver of basic filing requirements is not warranted, as the facts disclosed in the referenced applications are not sufficient to establish that Liberty Media intends to take actions, such as conversion of preferred to common stock and installation of a board majority, that would constitute exercise of de facto or de jure control.

Since the dismissal, Liberty has disclosed that it entered into a Forward Contract (with a settlement date scheduled for July 11, 2012) to purchase 302.2 million shares of Sirius common stock and purchased an additional 60.35 million shares on May 8th and 9th. According to Liberty, these two transactions increased its ownership interest to "approximately 46.2%." Will these actions be considered sufficient "to establish that Liberty Media intends to take actions, such as conversion of preferred to common stock and installation of a board majority, that would constitute exercise of de facto or de jure control" or does Liberty need to actually convert its preferred shares to common shares to further demonstrate intent?

Liberty's preferred shares give it substantial rights (under the Certificate of Designations) that it may be unwilling to relinquish prior to being granted de facto control. These rights include the requirement that Sirius obtain Liberty's consent before undertaking any of the following:

  • the grant or issuance of Sirius equity securities

  • any merger or sale of all or substantially all of the Sirius assets

  • any acquisition or disposition of assets other than in the ordinary course of business above certain thresholds

  • the incurrence of debt in amounts greater than a stated threshold

  • engaging in a business different than the business currently conducted by Sirius

  • amending the Sirius certificate of incorporation or by-laws in a manner that materially adversely affects the holders of the preferred stock

However, Liberty can retain these rights so long as it continues to hold at least half - or 6,250,000 - of its preferred shares. Will Liberty be converting up to half its preferred shares into common shares to further demonstrate its intentions to take control of the board?

One of the arguments used by Liberty in its application was that if its preferred shares had been converted and voted, it would have had more than enough votes to elect its own slate of directors. At the Sirius annual meeting this week, no director received more than 1,417,014,485 votes. Half of Liberty's preferred shares can be converted to 1,293,488,381 common shares, and along with Liberty's forward contract and recent purchase would give them more than 1.6 billion common stock votes. That would have been more than enough to elect a competing slate without affecting Liberty's other rights.

Summary

Liberty has stated that it intends to file an appeal and has a little over one week left to accomplish this. Its forward contract and open market purchase can be used to demonstrate that Liberty is taking steps to take de jure control. Converting half its preferred shares (allowing it to maintain rights) would make their case even stronger. It will be interesting to see how the FCC rules. Will it now determine that 46.2% is the new 50%?

Disclosure: I am long SIRI.

Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time. I have no positions, or any plans to open positions in the next 72 hours, in Liberty Media.