The biggest drama in new York City is not on Broadway but instead on the Avenue of the America's, where Sirius XM (NASDAQ:SIRI) houses its corporate offices. The battle lines between Sirius XM and Liberty Media (NASDAQ:LMCA) seem to be taking their final shape as the companies trade jabs with FCC filings and debate about the ultimate outcome of Sirius XM.
This all initially took shape back in March when Liberty petitioned the FCC for De Facto control over the Sirius XM licenses. Sirius XM rejected the concept that Liberty had De Facto control and informed the FCC of that sentiment. Absent any additional information the FCC sided with Sirius XM and rejected the Liberty application. However, the FCC also spelled out that Liberty Media had not demonstrated that they were actually making any moves, and thus the possibility of an appeal was born.
Subsequently Liberty Media did indeed make some moves. The company closed on the terms of a forward purchase agreement for 302 million shares, made open market purchases of another 62 million shares, and effectively took its stake in Sirius XM from about 40% to an impressive 46.2% (subject to closing on the forward purchase deal). But that was not all. Liberty then took things further by indicating that it planned on converting half of its preferred shares in SIRI to common shares, soliciting large shareholders to align with its positions, nominating enough directors to control the board, and if needed, go to a 51% stake and insert an entire new board unilaterally.
On its face the proposal outlined by Liberty Media in its appeal of the FCC decision seemed to address all of the major concerns expressed by the FCC. At that point Sirius XM even acknowledged that the company was negotiating with Liberty Media.
Then the gloves came off and the battle lines were drawn.
On June 11th, Sirius XM penned an opposition letter to the FCC that once again requested that the FCC deny Liberty Media de facto control. The letter has Sirius XM stating that there are no new material facts in this case and that all of the moves by Liberty Media are still essentially "theoretical." Incredibly, Sirius XM goes so far as to quote (in an out of context manner) Liberty Media CEO Greg Maffei in an interview with CNBC. The CNBC interview stated the following:
CNBC - Something else that you've been enthused about is the $6 billion gain. The greatest investment probably of all time. You came in when the company was close to bankruptcy. Many people think that you're going to pursue a Reverse Morris Trust basically a way to spin it off to shareholders in a tax-free manner. Is that the case and is all of this just posturing to agree to allow you to pursue?
Maffei - I'm not sure where we're going with the investment. We've said there are two logical paths for us. One is to go in control, the other is to pursue a Reverse Morris Trust the way did with DirecTV (DTV) and ultimately be with our shareholder's hands. I can't tell you which way we're going to go. If I knew, I would tell you. We think Sirius is a great company. It has a lot of potential going forward. and we're not in a rush to make any decisions.
Sirius XM insinuates that Liberty is withholding information from the FCC and instead sharing it with the media. The fact of the matter is whether Liberty intends to simply take a controlling interest or conduct a Reverse Morris trust is not material to the decision Liberty is asking the FCC to make. In either situation Liberty Media has outlined a path that would take it there.
Further Sirius XM now states that if Liberty is going to take a de jure control position that the FCC should deny the application because it is for de facto control. This is splitting hairs more than before. Should Liberty gain de jure control they will also have de facto control.
By the end of the filing Sirius XM essentially pulls out its last ditch effort and states that Liberty should, "... present the FCC with an application seeking approval of such a transfer that follows the 'established Commission procedures for hostile corporate takeovers' as detailed in the Tender Offer Policy Statement."
The next question is what all of this means to shareholders. In my opinion it means that the negotiations between Liberty and Sirius XM are at an impasse of sorts. If these negotiations are indeed at an impasse, it would seem to indicate that the terms being proposed by Liberty Media are not acceptable to the current Board of Directors. If the current Board is not satisfied, it is likely that the average shareholder would not be satisfied either. This is being played as if Sirius XM thinks that Liberty is bluffing. The problem is that Liberty has all of the cards, and the outcome is already known. We are one raise away from Sirius XM being "all-In" and losing the match.
These recent events give me even more pause than I previously had. I have entered a trade to sell half of my Sirius XM position and use those funds to invest into Liberty Media. This strategy buys me a little more time to see how this plays out and helps to take the risk as well as the reward out of the mix for the time being. It is my belief that Liberty will ultimately get what it wants. It is also my belief that there is a distinct possibility that Liberty is looking for the premium here (something that average SIRI holders want) in much the same way it got one in the DirecTV Reverse Morris Trust.
The FCC will likely decide in the next few weeks. We may see some interesting activity between now and then. Liberty may indeed get hostile.
Disclosure: I am long SIRI.
Additional disclosure: I have initiated the sale of half of my position in Sirius XM to facilitate the purchase of shares of equal vale in Liberty Media.
