When it comes to Sirius XM (SIRI) there is plenty of coverage out there. There are also plenty of facts that investors can consider. The confusion surrounding this equity often comes from opinions regarding possible paths that can transpire as Liberty Media (LMCA) makes its moves for an end game regarding its position in Sirius XM.
The first thing we have to acknowledge is that informed speculation and discussion is healthy. The next point to consider is that as investors we need to step back and look at the issues from the standpoint of both Liberty Media and Sirius XM.
It has long been my opinion that Liberty Media is in the driver's seat and that anything current Sirius XM management can do is reactionary to a move made by Liberty Media. Realistically speaking there is nothing proactive Sirius XM can do other than to pick up the phone and try to negotiate with Liberty Media.
- With its preferred shares Liberty Media holds five preferred board seats
- With its preferred stake Liberty Media holds "veto" power over use of cash issues exceeding certain limits
- With its preferred stake Liberty Media holds "veto" power over share offerings beyond certain limits
- With its preferred stake Liberty Media holds "veto" power over the addition of debt beyond certain limits
- With its preferred stake Liberty Media Liberty Media cannot vote on the board slate representing the common shareholders
- With its preferred stake Liberty Media can vote on all other matters (where appropriate they would rescues themselves from a vote)
- Liberty holds these rights as long as they retain at least half of their preferred stake
- Liberty Media's combination of preferred, common and notional shares equates to about 46.2% of the company
- Liberty Media needs approval from the FCC to take control (above 50%) of Sirius XM
- Should Liberty Media go over 50% of the common it could relieve the current board of its duties and put in its own slate of directors. This can happen by simply penning a letter.
Liberty Media has several options it can take. This is often where opinions clash. However, regardless of opinions, the facts above dictate that Liberty Media remains in the drivers seat as it relates to what can transpire.
The issue of Liberty conversion of preferred shares into common shares is often discussed. Discussion surrounding when they might convert, or whether they will convert has varied opinion. Central to a lot of the debate is that Liberty would lose certain rights if they convert. While this is true to a certain extent, it really does not matter. If Liberty gains enough common shares to equate to a position of over 50% of the company, it can convert and take control of the entire board. They would actually have more "rights" than offered by the preferred stake if this were to happen.
What investors need to understand is that in the grand scheme of things the election of a new board of directors this week matter very little if Liberty Media initiates moves to take its stake over 50%.
I mentioned recently that shareholders should become familiar with the terms "fairness test" and "majority of the minority." Should Liberty Media take a position over 50% and institute its own board slate (as would be its right), activities would typically be tested for fairness to the minority (non-Liberty stake shareholder) by a third part. In addition, Liberty would typically want to get a majority of the minority in matters. By obtaining a majority of the minority things like litigation could be avoided.
For some reason there seems to be a fear of Liberty by some of the more passionate investors in Sirius XM. I don't really understand why this fear exists. Mel Karmazin probably put it best when he stood on stage at the shareholder meeting and stated, (paraphrase) "Regardless of who 'owns' the stock of Sirius XM, the company will be performing and delivering great numbers ... that is not going to change." Perhaps these passionate shareholders would be less fearful if they knew the steps Liberty was going to take, but in the end, the reality is that Liberty Media, as a large shareholder, wants to make Sirius XM as much of a success as anyone. After all, they have a lot of value tied up in this equity.
The cards held by Sirius XM are very few here. Sirius XM can hold firm and negotiate to the best of its ability, but the stance that the current board can negotiate from is not terribly strong. Sirius XM can look for good terms on a Reverse Morris Trust merger deal, negotiate an entire buyout, and negotiate terms on a Liberty stake of 80% and use of the NOLs. They have no power at all to stop Liberty from taking control. Simply stated, Sirius XM can only try to get the best possible deal along the way.
Another topic of discussion is Liberty taking a 51% stake vs. an 80% stake vs. a 100% stake. Again, there seems to be a lot of confusion here. Let's break this down:
At 51% Liberty can do a Reverse Morris Trust. This requires a negotiation with Sirius XM. That negotiation can be with the current board and management left in place by Liberty Media or with a newly installed board put in place by Liberty Media. In either situation the fairness tests and majority of the minority would be principals that would likely apply. A Reverse Morris Trust cannot happen unless agreed to by both parties. This is how and why shareholder value will be preserved and perhaps where a much talked about "premium" could come into play. Do not expect a massive premium, but the minority can play at least a little hardball in these negotiations.
At an 80% stake Liberty could, in theory, utilize the Net Operating Losses of Sirius XM. The company currently has almost $8 billion in NOL's. These NOL's can be used to offset gains and thus minimize tax exposure. Liberty getting to 80% does not mean that they can simply take the NOLs and use them. They could negotiate with the minority to use them. Liberty would trade off something if that was the path they wanted to take. Often lost in the discussion is that Liberty can still benefit greatly from Sirius XM using the NOLs. There may be no negotiation even needed because Liberty as a huge shareholder in Sirius XM will see the benefit anyway. This is where Liberty going to an 80% stake looses some steam. Why would Liberty put in more cash and a bigger premium into buying shares to gain access to something that they are already benefiting from?
The 100% stake is interesting. It would require a tender offer, but could wind freezing the NOLs that carry so much value. This issue is complex, but centers around the fact that Liberty would need to go over a threshold of adding grater than 40% of a company. Depending how one reads the regulations, this could freeze and/or wipe out the NOLs. The fact of the matter here is that in this case Sirius XM shareholders would not need to worry about the NOLs because Sirius XM shareholders would no longer exist. The issue of NOLs would be a Liberty Media worry. What Sirius XM shareholders would need to worry about in this case is how much the tender offer for all shares would be, and the outfit selected to do the fairness test.
In the near term the key phrase for investors is uncertainty. It is uncertainty that is impacting this equity now. Time to place your bets.
Additional disclosure: I have no position in LMCA.