If you are invested in Sirius XM (SIRI) or Liberty Media (LMCA) you are likely aware of the ongoing issue regarding de facto control of the licenses held by Sirius XM. In a nutshell, Liberty Media has requested that it be given de facto control by the FCC of these licenses. Sirius XM has been active in asserting that Liberty should not be granted such control. For the benefit of readers, a quick review is perhaps in order.
- In Mid March of this year Liberty Media expressed a desire to gain de facto control status and requested that Sirius XM give Liberty the passwords the company uses for FCC filings so that an application could be submitted to the FCC. Sirius XM disagreed regarding the issue of control and refused to give the passwords or sign the application for transfer. This caused Liberty Media to file its request in an indirect manner with the FCC. The original filing did not discuss a forward purchase agreement or an open market purchase of Liberty Media.
- On March 22, 2012 Sirius XM issued a letter to the FCC expressing its side of the argument.
- On March 30, 2012 Sirius XM filed a "Petition to Deny" with the FCC, requesting that the commission deny the Liberty Media request on various grounds, including improper filing, a lack of demonstrated intent by Liberty, and other factors.
- On April 12, 2012 Liberty Media responded with two filings. One outlined the positions Liberty Media had with respect to Sirius XM and the other was an "Opposition to Petition To Deny."
- On April 20, 2012 Sirius XM filed a letter with the FCC reiterating that Liberty Media should not be given de facto control.
- On May 4, 2012, some 45 days after the initial application was submitted by Liberty Media, the FCC rendered a decision denying the Liberty request for de facto control. The FCC noted the procedural defects in the Liberty application as well as the fact that Liberty had not outlined actions that would lead to de facto control.
- On May 8, 2012 Liberty Media announced that it had entered into a forward purchase agreement for 302 million shares of Sirius XM in December. Added to its 40% stake represented by the preferred shares, Liberty would now have an effective 45.2% stake in Sirius XM.
- Over the next couple of trading days Liberty Media added an additional 60 million shares of Sirius XM on the open market taking its converted stake to 46.2%.
- On June 1, 2012 Liberty Media appealed the FCC decision and entered into the record the added shares, the fact that it intends to convert half of its premium shares, its intent to solicit other shareholders to vote with it, and its intent to place a new Board of Directors at the company. Essentially Liberty Media outlined a plan of action that addressed all FCC concerns with the exception of the procedural issues surrounding the way the application was filed and the lack of signature from Sirius XM.
- On June 11,2012 Sirius XM filed an "Opposition To Petition For Reconsideration" citing similar reasoning as to the original arguments.
- On June 20, 2012 Liberty Media filed an answer to Sirius XM opposition and restated its goals with regard to Sirius XM.
So here we are, some 70 days after the appeal and we still have not heard anything from the FCC. This has caused quite a bit of speculation. On one hand, if an FCC denial was a slam dunk, couldn't that decision have already been expressed in about the same 45 day time-frame as the original application? O the other hand, perhaps the FCC is giving serious consideration to the Liberty request. The truth is probably somewhere in the middle.
One thing investors need to realize is that Liberty Media needs FCC permission to have a majority stake in Sirius XM. Set aside de facto control for a moment. Liberty Media at least needs the FCC to "bless" them as potential controlling owners in the company because the FCC governs the licenses. Without that permission Liberty cannot move to a majority stake. Getting de facto control would be an acknowledgement by the FCC that Liberty is a "worthy" holder of the licenses. There is nothing, I stress again, nothing, in the Liberty record that the FCC would consider as Liberty being a bad owner. Thus, the issue likely boils down to a setting of precedence of sorts.
Stepping away from the FCC for a moment, consider any lawsuit. Judges typically highly encourage the parties to negotiate and come to terms and then present those terms for approval. In doing this the judge is the issue is finalized and valuable court time is not required. Another factor in this that if the parties can reach an agreement the judge is not asked or required to pass proverbial judgment. Could this be why there is a delay at the FCC?
Think about it. Let's assume that the current Liberty application is acceptable in all forms except the procedural method of filing and the lack of a signature from Sirius XM. If the FCC sides with Liberty they set a precedence of allowing no-electronic filings without passwords to happen, and that any future company can get a massive position in a company and move for license transfer regardless of the opposition of the target company. The FCC is in a precarious position. Would it not be better to sit back a bit and see if Sirius XM and Liberty can come to amicable terms, sign the proper papers and apply via the accepted electronic method? Thus avoids setting a precedent and allows a smooth transaction.
In my opinion this is exactly what I think is happening. The ultimate result may well be that Sirius XM and Liberty are able to reach a deal that works well for both parties and that a signature will be applied. Now we get into the debate of what that deal may look like.
Liberty Media has been public in expressing that it wants to get a controlling interest. Sirius XM has been public in saying that they want to get the best possible deal for shareholders. Liberty has also expressed that it would want to recoup the cash used to pick up the 10% to 11% of shares that will ultimately be required for Liberty to conduct a Reverse Morris Trust. Sirius XM just refinanced $400 million in debt instead of using cash. Could the company be holding cash to facilitate a deal with Liberty? Could a share buyback be on the table again to facilitate keeping the Liberty cash outlay to get to 51% smaller? How would management present that to shareholders? Why would Sirius XM make it easier for Liberty to get to 51%?
There are indeed many questions, and that leads to speculation. One thought process is this:
The Liberty preferred stake has some rights that common shares do not. These rights include a sort of veto power over the use of cash, debt, and issuance of shares. Liberty holds these rights as long as it maintains at least half of the original 40% position in preferred shares. Logic dictates that these preferred shares should carry more value than common. If Sirius XM wants these shares off of the table, there may well be a premium paid to do so. Think of it like the premiums paid to remove debt early, only in this case it is a premium paid to remove the Liberty rights.
If Liberty wants a logical premium on preferred shares, and wants to get the cash back out of the company for the stake it had to invest above 40%, then it could stand to reason that minimizing the Liberty cash outlay may be preferable to Liberty increasing its stake on the open market and Sirius XM getting no "premium."
In this situation management could express to shareholders that it was able to negotiate less of a premium to Liberty Media by facilitating a deal with the company and that the proposed Reverse Morris Trust has the extreme benefit of removing the Liberty "veto" power as well as removing one very large shareholder carrying board influence and having enough voting power to exert its desires upon the company.
If past history tells us anything, it is that while you always have options at your disposal, they are not always the best options. In my opinion Sirius XM is getting its hand forced a bit, but the intent of Liberty is not to damage the company, but rather get the most bang for its buck. This would be exactly why Liberty may be willing to "discount" what may otherwise have been a healthy premium in cutting a deal. If Malone can cut a deal where he maintains a stake and has voting power in the neighborhood of 20%, it may be just the recipe for success.
It is my opinion that the FCC is in hopes of not having to set a precedent. It is also my opinion that Liberty and Sirius XM are at the table hashing out some early details of a deal. Liberty has just announced that it is spinning off Starz, so a company already flush with cash will have even more at its disposal should a more harsh strategy need to be employed.
In closing, the subject of which is the better investment play is still an active discussion. I am at 50% liberty and 50% Sirius XM. I am very comfortable with that move and stand to see a tax free benefit with my Liberty stake when Starz is spun off. Which way to go is an individual strategy that each person must figure out themselves. There are risks and benefits surrounding each side of that debate.