With headlines circulating today that it will be Liberty Media (NASDAQ:LMCA) that sees a premium in the battle for control of Sirius XM (NASDAQ:SIRI), and not the satellite radio provider, I felt it was time once again to address the issue.
I realize that my opinion of the situation with Liberty Media has not been popular with some long term Sirius XM investors, but this is not a popularity contest. It is about positioning yourself to make money. This is why I made the decision about a month ago to sell off half of my stake in Sirius XM at $1.87 and use the proceeds to buy into Liberty Media at $83.47.
My decision was not due to a lack of confidence in Sirius XM, but rather a vote of extreme confidence in Liberty Media and the likelihood that it would be Liberty and not Sirius XM that has the upper hand in the negotiations. Part of my thought process was to have some stake on the eventual winner. While that may not be the most profitable move, it did remove some risk in the "premium" battle.
When Liberty Media conducted its Reverse Morris Trust with DirecTV (DTV), it was Liberty that received the premium. I took that information and established that a small premium would be the starting off point for Liberty Media as it negotiated with Sirius XM. Certainly there is a school of thought that says that if Liberty needs shares it will need to pay a premium. I subscribe to the school of thought that Liberty already has a massive stake and only needs to add a modest amount of shares to take it over the top. In many ways Sirius XM's hands are tied. With its preferred stake Liberty Media has a form of "veto" power over the use of cash, debt issues, and the issuance of shares. Further, Sirius XM cannot institute a poison pill to stop Liberty.
The facts are that Liberty Media does hold the cards. Yes, I have had some say that Liberty must "negotiate" with Sirius XM and because of that it will have to pay the piper. Liberty is already negotiating with Sirius XM. If Liberty does not like the progress in those talks, it can simply make a left turn and virtually insert a new Board to negotiate with. With each additional step Liberty needs to take to get the deal done, there is a distinct potential that the premium Liberty seeks will increase.
Liberty Media does not need control of the company to insert a Board. There are some who feel Liberty must move to 51% in order to change out the Board of Directors. This is not at all the case. Liberty simply needs enough votes to vote in its own slate. If Liberty converts half of its preferred shares it gains substantial voting power while still maintaining all of the "veto" rights the preferred stake carries. I theory that voting power may not be enough if every other shareholder voted against Liberty, but the reality is that by simply doing the conversion Liberty will have 200,000,000 more votes than have voted for any board seat in the last three years. If Liberty is shrewd (and we know they are), they will get some of the big players to vote with them. This can virtually guarantee a new Board that is "favorable" to the Liberty side of the equation.
I already can see the comments. The new Board has a fiduciary responsibility to the existing shareholders. Very true. That fiduciary responsibility would be exactly why that new Board would hire an outside company to review any proposals for fairness. It is called a fairness test, and is something I have written about in the last several months. In addition, Liberty and a new Board would likely seek to get a majority or a majority of the minority vote anyway (depending on whether or not Liberty is above or below 50%). Remember though, Liberty would have at least 46% of the votes, and likely have enough major players on its side to impact the votes.
Today Liberty's John Malone was quoted as saying:
"There are three parties in this deal - Sirius and its shareholders, Liberty and its shareholders, and there's me personally because I am the controlling shareholder in Liberty. So when you ask yourself, 'Should there be a control premium and if there is one, who should get it,' don't forget about me."
It is my stance that if Liberty Media has to buy more shares, call for special votes, and essentially jump through hoops that it will want to get a return on these moves in the negotiation process. I am not saying that the premium will be massive, but the desired premium could grow incrementally as this process wears on. Essentially with each passing step Liberty Media gains leverage and Sirius XM loses it. With my half and half investment I have essentially removed the "drama" from my equation. If I see a distinct possibility of something I can adjust accordingly, otherwise I can sit back and let my satellite radio investment move onward and upward no matter who has control.
Selling half of my Sirius and placing that money into shares of Liberty Media is a vote of confidence in the future of satellite radio. As an investor I do not care who owns Sirius XM. I care about how it performs. I do not care who runs the company. I care that it is run well. The key is getting past the uncertainty.
As most investors know, Liberty Media currently has an application in front of the FCC seeking de facto control of the satellite radio licenses. Debate about whether or not the FCC will grant such control has been ongoing for months now. My opinion is that Liberty with de facto control makes the process of change easier. If denied, Liberty will move to de jure control with a new Board of Directors, etc. These are the additional steps that change the dynamic of negotiations. The end game is essentially known. What is unknown is the costs to Liberty or Sirius XM to get there.
Should everyone run out and invest in Liberty Media? No. Each investor has to weigh the benefits and risks and arrive at their own conclusion. Should every investor consider the fact that it may be Liberty and not Sirius XM that gets the premium. YES! That is what happened with DirecTV and that is something Sirius XM investors need to consider as a distinct possibility. Could the current Board negotiate a premium for Sirius XM shares? Yes. It is simply my opinion that doing so would be an uphill battle.