Liberty Media Closes In On De Jure Control Of Sirius XM

Aug.15.12 | About: Sirius XM (SIRI)

On August 14th Liberty Media (NASDAQ:LMCA) filed a Form 4 with the SEC disclosing the following purchases of Sirius XM Radio (NASDAQ:SIRI) stock:


Number of Shares

Price Paid/Share












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In addition, the Form 4 also states that Liberty has entered into another forward purchase agreement. The form stated:

On June 29, 2012, Liberty Radio, LLC, a wholly-owned subsidiary of the Reporting Person, entered into a forward purchase contract (the "Forward Contract") with an unaffiliated counterparty covering up to a maximum of 220,000,000 notional shares of the Issuer's Common Stock. The exact number of shares to be covered by the Forward Contract is to equal the number purchased by the counterparty to establish its initial hedge. On August 10, 2012, the unaffiliated counterparty completed its initial hedge, and the number of notional shares of Common Stock covered by the Forward Contract has been fixed at 41,087,753 shares. Under the Forward Contract, the expiration date is to be October 11, 2012, or 60 days after the completion of the counterparty's initial hedge. The base price under the Forward Contract is approximately $2.047 per share.

The combined total of the forward contract and market purchases is 131,057,753 shares. This will bring Liberty's ownership interest in Sirius XM to 3,086,449,880 shares (including those shares underlying the 7% Exchangeable Notes). This represents a bit more than 48% of the ownership of Sirius XM. It is interesting that the Forward Contract initially called for "up to a maximum of 220,000,000" shares. If the Liberty counterparty had been able to obtain the full amount, Liberty's ownership percentage would have risen to just over 49.5%.

Note that the percentages of ownership are a moving target as Sirius XM share counts increase when employee stock options are exercised. Since the Sirius XM second quarter 10Q was filed, several Form 4's have been filed for key Sirius XM insiders that have increased the number of shares outstanding since the end of the quarter. These include filings for options exercised and shares sold by CEO Mel Karmazin and CFO David Frear. It is also possible that non-insiders have also exercised options.

Regardless, it appears from the Forward Contract that Liberty intended to move very close to majority control of Sirius XM. When their counterparty was unable to acquire the full 220 million shares, Liberty went ahead with open market purchases at substantially higher prices than the $2.047/share price in the Forward Contract.

Recent Price Activity

The recent run up in the price of Sirius XM shares began shortly before the company released earnings August 7th. Following earnings, volume exceeded 600 million shares between August 7th and 9th, more than 4 times the average over the past 3 months, and shares reached as high as $2.49. At that point - August 10th - Liberty added some additional fuel to the rally by making its purchases and shares of Sirius XM reached a new post merger high of $2.54 on the 14th.

Obviously, most of the price run-up had little to do with the Liberty purchases since most of the price rise occurred before the Liberty purchases. Even the buying for the Forward Contract would have had little effect as the counterparty was only able to acquire 41 million shares - far less than the previous contract for 302 million shares.

Will Liberty Pay a Premium?

For months there has been speculation about whether or not Liberty would pay a premium to take control of Sirius XM. And, if so, how much would it be? When Liberty entered the first forward, shares were trading at $1.82 and Liberty paid $2.15 for 302 million shares. When Liberty entered the second Forward Contract on June 29th, the shares were trading at $1.85, but they were only able to fill 41 million shares at $2.05.

Liberty once again entered the market, and they were "forced" to pay about $2.48 per share. Is this the premium some Sirius XM investors had in mind? To be candid, $2.48 is more than I expected Liberty to have to pay for any of their shares, although the average of all their purchases so far is substantially less (about $2.20), and more in line with my expectations.


It should now be clear to Sirius XM investors that Liberty is moving ahead with plans to take control of Sirius XM with or without the co-operation of the Sirius XM board. It should also be obvious at this point that Liberty is willing to use its own capital to make it happen - so far, almost $1.1 billion.

Needing less than 150 million more shares, and probably less than $350 million, the only significant hurdles left for Liberty appear to be FCC and other regulatory approvals.

Disclosure: I am long SIRI.

Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, at any time. I have no positions, or any plans to open positions in the next 72 hours, in any of the other companies mentioned in this article.