Friday presented an interesting day for Sirius XM (NASDAQ:SIRI) and Liberty Media (LMCA). Liberty Media revealed, after the close, that it had acquired more shares of Sirius XM on the open market, as well as a new twist. Liberty Media has pulled its previous FCC filing for "de facto' control and has replaced it with a new filing requesting "de jure" control.
Readers may want to read this piece carefully because it will have a lot of facts, opinions, and possibilities outlined. There are many moving parts here, and things are just now getting very interesting.
There is a key aspect to the new Liberty Media filing and it can be found in this paragraph:
"Liberty Media is filing this application for FCC consent to the transfer of de jure control of Sirius to Liberty Media and is simultaneously withdrawing the Liberty Media Petition. Liberty Media intends to purchase sufficient additional shares of Sirius common stock such that, upon conversion of its Preferred Shares, it will own more than 50% of the total outstanding shares of Sirius, giving it de jure control of Sirius including the ability to control the membership of the Sirius Board of Directors. Liberty Media intends to purchase such additional common shares of Sirius as soon as practicable, subject to market conditions. However, Liberty Media will not convert its Preferred Shares in sufficient quantities to own more than 50% of the outstanding common stock of Sirius until the Commission grants this application. Consistent with its certifications in the accompanying applications, Liberty Media will have purchased sufficient shares of Sirius' common stock and will convert its Preferred Shares such that the transfer of control will be completed within 60 days of Commission consent."
The first thing to note is that Liberty Media has withdrawn its request for "de facto control". This actually simplifies things for the FCC greatly. With the "de facto" filing Liberty Media was essentially asking the FCC to set a precedence where one company could get near control of another, file a non-electronic application with the FCC, without the signature of the other company, and the FCC would make a ruling. Obviously the FCC was not likely to keen on setting precedence and was probably waiting to see if a deal could get done between the two companies.
The second item to note here is that Liberty has broadcast its intent and the steps it will take to get there. Liberty will purchase enough shares of common stock, so that upon conversion of its preferred shares to common, it will have enough common shares to have over a 50% stake in Sirius XM. This is where things get interesting. In its calculations Liberty is counting a)its preferred stake on an as converted to common basis, b) its common shares, c) the assumption that the notional shares in a second "forward purchase contract" will be converted to shares, d) its convertible shares tied to the $11 million in 7% convertible notes Liberty holds that convert to another 5.87 million shares, and e) the assumption that the other holders of the 7% convertible notes do not convert them into 287,000,000 shares.
It is my opinion that the FCC now has a much easier decision than it did previously. There is no reason that the FCC would take exception to Liberty Media having control of Sirius XM. There will certainly be a commenter or two that will want to discuss the chance that the FCC could deny Liberty Media "de jure control", so I guess this is as good a place to discuss it as any. In my opinion the chance that the FCC will deny Liberty Media in its request is 0.000001%. Yes, there is a chance that the FCC could deny Liberty Media. There is also a chance that Saturn exits its orbit around the sun tomorrow and winds up on a collision course with earth. Discussion on FCC dismissal over. Essentially the FCC simply needs to do its due diligence and set any requirements in place for Liberty to gain control. Liberty has said it will convert its preferred stake, the FCC will likely ensure that happens with a condition applied to approval. It is really that simple.
What about those pesky 7% convertible notes? If those holders convert, Liberty may not be over 50% anymore. What does that mean? Here are a few reasons why those note holders will not convert:
- Liberty is likely in conversation with most of the major holders of these notes. These holders will know what Liberty is trying to accomplish, and because the result is essentially a foregone conclusion will not stand in the way.
- These notes are bought for the interest they bear, not the underlying shares.
- Everyone is anticipating a share buyback. Why unwind the 7% interest note now to convert to shares when you can get the 7% and benefit from any share buybacks between now and when the debt is due?
How Fast Will Things Move?
This question is probably burning in the minds of everyone. The simple answer is that certain aspects will happen quickly while other aspects will take time to unwind. The FCC approval should happen fairly quickly (i.e. within 90 days). Other aspects have variable timeframes based upon the situation with negotiations, and whether or not the current Board of Directors is still in place.
In essence, Liberty Media has now set a timeclock on Sirius XM's existing Board of Directors and management. I have long said that Liberty holds all of the cards and that the writing was on the wall with regard to control. This latest move is bringing the end game closer. Liberty Media has put a serious shot across the bow of Sirius XM. Liberty has stated that they will indeed take "de jure" control and even insert its own Board of Directors if needed. Sirius XM's current Board and management now have very limited tome to negotiate.
There was a time when I had stated that it was possible that Liberty Media could have all of the shares it needed already to conduct a desired Reverse Morris Trust. This could have been accomplished, for example, by Liberty Media combining its Sirius XM stake with its stake in Live Nation to present a bigger company than Sirius XM. Something like this could still happen, but the new filing is essentially taking that path of action off of the table for the time being. Liberty will need to go to a stake above 50% now.
In my opinion Sirius XM's existing management and Board has about 2 to 3 months, and maybe less, to cut a deal with Liberty Media. If that does not happen, look for Liberty Media to move above 50% and insert its own Board of Directors. This Board change can happen without a shareholder vote. This move would be done to apply more pressure to complete negotiations, as well as to control the outcome.
Not all of the events that will transpire involve Sirius XM. Liberty Media is also in the process of splitting itself from Starz. While it may appear that a Sirius XM move can not happen until this is completed, the reality is that all of this will be happening at essentially the same time. Consider the timing.
- Liberty files new de jure control with FCC in mid August. Ninety days would bring us to mid November.
- Liberty's second Forward purchase Contract does not close until October 11
- Liberty intends to have the Starz/Liberty split complete by the end of the year. In my opinion it will be done in early to mid November.
When will the Reverse Morris Trust Happen?
At this point I am seeing the Reverse Morris Trust as happening a bit down the road. The first events I see happening once Liberty gains control are a share buyback and some added debt in order to accomplish this. As a majority owner Liberty Media stands to benefit greatly from a share buyback, as does any shareholder.
If a negotiation cannot be agreed upon by the existing Board of Directors and a new Board is inserted, then Liberty Media, as a controlling entity, would have to conduct "fairness tests" and likely want to seek out a "majority of the minority" when determining the components of a Reverse Morris Trust. I see one potential component being Liberty Media wanting to sell back the 10% stake it had to buy in order to get from 40% to 50%. Sirius XM may need to take on additional debt to accomplish this and this may not be popular with current shareholders. One way around this is determining a premium paid to Liberty shareholders to accomplish the merger. All of this will take time.
Sirius XM Is Powerless To Stop This
That is correct. Sirius XM is powerless to stop Liberty Media from gaining control. The sooner everyone gets to this realization the better off they will be. The kicker for those that refuse to believe this is that regardless of what entity has control the company will still perform remarkably well. There is no poison pill, no special vote, no possible dilution, and no action that will change the inevitable. The company (Sirius XM) has agreed to cooperate fully with the FCC. That does not mean that Sirius XM agrees with Liberty or that it will make the steps easy for Liberty.
To Convert or Not To Convert...That Is The Question
Liberty Media had stated in its earlier filing that it would convert half of its preferred stake in Sirius XM in an effort to get "de facto" control. This would have allowed Liberty to vote on a new Board of Directors with a lot more common shares while at the same time preserving the "veto" rights that the preferred stake offers. Yes, Liberty would give up two board seats with conversion of half of its preferred, but it would gain the prize of a new Board essentially hand selected by Liberty.
When Liberty converts preferred shares into common it gives up Board seats. There will be a time to convert, but when will that be? The answer is easy. The correct conversion time is when the FCC renders a decision that Liberty can have "de jure" control. Is it possible that some of the preferred shares get converted prior to an FCC ruling? Certainly it is, but in my opinion Liberty has raised the stakes now. It will hold off on converting any preferred until the point where Liberty will essentially be immune from the negative impacts of conversion (i.e. when it can insert its own Board of Directors). The only way I see Liberty converting prior to "de jure" control approval is if Liberty and Sirius XM can reach a deal prior to the FCC decision.
The Clock Is Ticking
As I have maintained for quite some time, the clock is ticking and with each passing day we get closer and closer to the inevitable result of Liberty Media controlling Sirius XM. As each step goes by without resolution this deal becomes more and more expensive for Liberty Media and by extension Sirius XM. The positive aspect is that the reward is quite good, and that the reward is not lessening.
Things To Be Aware Of
Liberty Media feels Sirius XM is under levered. This means that Liberty feels that the company can take on more debt. Liberty could well seek that Sirius XM take debt to deliver a premium in a merger. Do not forget that Malone (Liberty) wants to get back any cash he (Liberty) spends to get control. The more Liberty spends to get there, the more it will want in a Reverse Morris Trust.
Stay Tuned! Things are just beginning to get interesting.
Disclosure: I am long SIRI, LMCA.