As expected Liberty Media (LMCA) has filed an appeal with the FCC regarding de facto control of Sirius XM (SIRI). While most investors expected this to happen there has been varied opinion on what the outcome may be. Rest assured, that is what this article is all about.
In the filing Liberty indicated the following points:
- Convert almost half of the shares of B-1 preferred stock, which together with the shares of common stock owned or acquired by the reporting person will constitute more than 32% of the total outstanding shares of common stock.
- As soon as practicable, nominate persons to serve on the issuers Board of Directors such that, if elected, persons nominated by the reporting person will constitute a majority of such Board of Directors
- Vote all of the reporting person's shares of common stock in favor of such nomination
- Solicit proxies from other shareholders if the issuer in support of such nominees
In addition to these points Liberty Media also indicated its possible intent to buy more shares on the open market such that it would have enough shares to install its own Board of Directors by unilateral action.
The best way to digest this news is one point at a time.
Conversion of Preferred Shares into Common
What Liberty has indicated is that they intend to convert nearly half of its Series B-1 Preferred shares into common stock. Liberty would take such action because it provides the company with the most leverage and power. By holding at least half of the original preferred shares Liberty retains all of the rights that those shares bring. Those rights include a near final say in use of cash, debt issues and issuance of shares. One luxury that the preferred shares do not offer is the right to vote on nominations to the Board of Directors. By converting almost half of its preferred stake Liberty gains substantial voting power on the election of a Board of Directors. In fact, by itself, Liberty would carry over 32% of the votes. While that certainly does not constitute a majority, it is likely enough to carry the final weight on any votable issue. This happens simply because the vast majority of shares do not usually vote. If Liberty can gain what they need via this route, it is the least expensive path.
Nomination of New Board Members
What Liberty is looking to do here is get at least two members of the existing Board of Directors replaced with Liberty nominated people. In doing this Liberty would control 5 Preferred Board Seats and two Common Board Seats out of a total of 13 seats. Simply stated, Liberty would have 7 out of the 13 Board seats and thus a majority of the Board.
To be clear, this path is not a guarantee for Liberty. These new nominations must pass an election which all shareholders would be eligible to vote in. This is where the conversion of the preferred shares comes into play. By converting the preferred shares Liberty increases its power over Sirius XM. Even with these moves Liberty may not win out. However unlikely that common shareholders unite and rise up against Liberty Media, it is possible. I do not see common shareholders making such a move as it makes little sense. In the end it is not going to change the outcome, and would come at the expense of great amounts of time, energy, and money. The exercise would simply be futile because of the next points.
Vote In Favor Of Nominees
This point is pretty straight forward. Liberty Media would vote all of its common shares, which make up 32% of the vote, in favor of its own nominees. As stated earlier, this would likely be enough to get the job done. If by some reason it is not Liberty has another option at its disposal which takes us to the next point.
Solicit Proxies of Shareholders
This move has likely already been happening at some level for quite some time. If Liberty Media can get some major shareholders to align their votes with the Liberty stake, the odds of successfully installing new board members increases. Large shareholders like Wellington, SAC, UBS and others carry substantial stakes in Sirius XM. Simply getting the top three shareholders to vote with Liberty would take the 32% voting power up to 40%. Add a few more and you can quickly see that Liberty could carry a lot of power.
Why would these large shareholders align with Liberty Media? Because they would see the writing on the wall. Liberty will gain control of Sirius XM. It is better to be helpful in that process than not.
Buy More Shares On The Open Market
This last point is the one that guarantees the outcome. Should all of the above moves fail Liberty Media will simply buy enough shares on the open market to take them over 50%. Once they get above that number the company can simply write a letter relieving the current Board of their duties and install its own Board of Directors. Other shareholders get no say in the matter.
There have been some that have insisted that a tender offer would be required at some point. As I have stated for quite some time, this is not the case. Liberty media can make the balance of its moves without ever having to put a tender offer on the table. This means the chances of regular shareholders getting a premium is essentially gone. For those that came to this realization earlier, this is nothing new. For those that held on to a flawed assumption are just now waking up to reality of the situation.
Liberty Media Holds All Of The Cards
As I have said for quite some time, Liberty holds all of the cards, or at least the most meaningful ones. Liberty cannot be backed into a corner, nor is there a realistic manner in which the desires of Liberty Media can be denied. Yes, there is some room for negotiation, but shareholders need to realize that Sirius XM is negotiating from a very disadvantaged position. Liberty Media has now outlined the road-map to control, and the steps it will take. Each step Liberty takes gives Liberty more of an advantage and takes away leverage from Sirius XM. Sirius XM's best play is right now.
Reverse Morris Trust
In my opinion this is the most desirable path for Liberty Media as well as the regular shareholder. This is probably being negotiated right now. In simple terms a Reverse Morris Trust would allow Liberty Media to have substantial tax advantages, while at the same time removing a large shareholder from dominance over the activities of Sirius XM. In this situation the Liberty stake would be spun off and shares distributed to current Liberty shareholders. That spun company would then merge into the existing Sirius XM with Sirius XM being the surviving entity. The company could now move forward without one huge shareholder and conduct its business like normal.
There May be Little To Fear
Some Sirius XM shareholders fear these moves by Liberty Media. In all likelihood there is actually little to fear. Sirius XM will continue on as an growing media entity that will be installing satellite radios into cars just like it always has. It will expand content offerings, develop the Internet radio side of the business, and even continue the roll-out of Satellite Radio 2.0. Liberty Media is not really an enemy in my opinion, but rather a conduit through which this company can move to the next level. Of course there could be negative aspects to all of this, but I do not place a high percentage on the chances of those happening.
Things will happen quickly, so pay attention. Stop looking for and expecting the invisible "premiums" and concentrate on the reasons you invested in this company in the first place. If you can do that, you will see that regardless of what happens with Liberty, your reasons for investment likely remain.
Additional disclosure: I have no position in LMCA.