At Wednesday's 2012 Media, Communications and Entertainment Conference in Beverly Hills, there was a lot more light shed on the ongoing takeover of Sirius XM (SIRI) by Liberty Media (LMCA). According to Sirius CEO Mel Karmazin, there has been absolutely "no dialog" between the two companies regarding the takeover. This includes Liberty's original filing for De Facto control of Sirius. A few people speculated that Liberty had asked for the passwords to file an electronic application, and Sirius turned it down. However, Mr. Karmazin set the record straight. There has been no dialog at all with Liberty regarding any of the filings. "We have not had any conversations about control," which includes the newest filing, and any of the stock purchases.
Most recently, on August 17, Liberty filed with the FCC for De Jure control of Sirius XM:
|SES-T/C-20120821-00776||Trans of Control||LIBERTY MEDIA CORP||E000158||08/17/12||Unblocked||Site|
|SES-T/C-20120821-00777||Trans of Control||LIBERTY MEDIA CORP||E110172||08/17/12||Unblocked||Site|
|SES-T/C-20120821-00792||Trans of Control||LIBERTY MEDIA CORP||E040363||08/17/12||System Entry||Site|
However, Karmazin thinks it is "unusual" that the application has not been "put out" for public notice. Once that happens, the public will have 30 days to voice an opinion on the application. He said that if there is opposition which "comes out of the woodwork," the application could be delayed. From this statement, it appears that Sirius will not oppose the filing. The FCC will study any opposition and make a ruling, which Karmazin said could be done prior to the end of the year. If Liberty were to spin Sirius off via a RMT, he estimates that it would take about six months, due to obtaining shareholder votes and consulting with the IRS.
At the same conference, Liberty CEO Greg Maffei said that he is also confused as to why the application with the FCC has not been "noticed up." "We are seeking a hearing as soon as possible," he said, and he likened it to a "black box" process. When asked about statements that Liberty wants to be reimbursed by Sirius for the $1.5 Billion it will spend to get to hard control of the company, Maffei said it would probably take about 18 to 24 months. And there is a "lot of flexibility" concerning how much time it would actually take. Liberty is in "no rush to get out of the Sirius state." He added that the Sirius management team has done a "great job," and they "deserve a lot of credit."
Maffei also said that once Liberty has over 50%, it will have the flexibility to begin a "share repurchase" program without being blocked by the current board. He was not clear whether this meant an entirely different board, or the fact that Liberty could force the current board to approve a buyback with hard control. Because Liberty already has five members on the board, it would not have to replace everyone to get a vote approved. Here is the current Sirius board:
Sirius XM Board of Directors
Common Stock Directors
Joan L. Amble
Leon D. Black
Lawrence F. Gilberti
Eddy W. Hartenstein
Chairman of the Board of Directors
James P. Holden
Chief Executive Officer, Sirius XM Radio Inc.
James F. Mooney
Preferred Stock Directors (LIBERTY)
David J.A. Flowers
Gregory B. Maffei
John C. Malone
Carl E. Vogel
Vanessa A. Wittman
The company would only need to get two votes from the "Common Stock Directors" and all five votes from the "Preferred Stock Directors" to have a majority. In other words, if the current board does not cooperate, the appointment of two new Directors to replace two of the Common Stock Directors would give Liberty fast, temporary control without causing complete chaos. Consider that keeping as many people as possible that are familiar with the company will help ease the transition.
There have been numerous articles, blogs and comments written lately about Liberty's buying shares of Sirius, and the idea that those purchases are actually keeping the stock price from dropping. Many feel that Liberty will take control and then "strip the stock" of its value. But what a lot of investors do not realize is that any dips in Sirius stock cause Liberty Media stock to dip. This is its biggest investment. As a matter of fact, the company has well over $8 billion tied up in Sirius, which is roughly 66% of Liberty's market cap of $12.5 billion. This number changes daily with price per share and stock option variances.
So actually if the company were to try to control the price of Sirius, it would be in its best interest to keep the price low, while purchasing more shares. But once Liberty has gobbled up everything that it needs, to get it to hard control, it will serve its own shareholders well to have the price of Sirius soar. Then Liberty stock will also soar. If Sirius tumbles, Liberty will follow. Look at the chart below; each and every dip Sirius makes is exactly duplicated by Liberty:
Using that logic, then it is about time for the stock to take off. Liberty will (or already has) go over 50% any day now. But a huge question mark is whether Karmazin will stay with Sirius if Liberty takes over. He has a contract that expires at the end of this year. At the conference, he said "Liberty does not need me... and that's ok with Mel." But he was quick to say that he will not abandon the company if the Liberty situation "lingers." He would extend his agreement, if it is in the best interest of the shareholders, to have a smooth transition. And if Sirius is spun off to public shareholders, he might be very interested (as CEO).
Karmazin told investors that he deliberately put negotiating his own new contract on the "back burner" so that minority shareholders did not think that he sold them out, or conspired to make a deal with Liberty. He has had absolutely no dialog with Liberty about whether he should stay or go. The stock began to fall on August 30, when it was announced that he would be selling millions of his own shares which ignited rumors that he might leave:
Then, Wednesday when he announced that there is a very real possibility that he might leave the company, shares dropped ten cents. However, investors must remember that if Karmazin's time calculations are correct, Sirius might not have any dramatic changes from a Liberty takeover for months. The two immediate changes Liberty might make would be a new Sirius Board, and a share buyback. Because I think a buyback will cause an immediate jump in share price, that tells me that Liberty does indeed want the price of Sirius to dramatically increase.
As far as having enough cash for a buyback, Karmazin said that the future prospects for free cash flow are "extraordinary." And he also mentioned that when Sirius recently borrowed $400 million at just over 5%, the company could have borrowed up to $1.5 billion at that interest rate. And both Mafei and Karmazin agreed the future for Sirius XM is very bright for many years. Because many of the 23 million Sirius subscribers have multiple subs, it is only found in 13% of U.S. households. This means that the market is not only wide open for new customers, but that it is also very popular with current subs.
It has been widely rumored that there was going to be a change with one of the OEM contracts that would be very lucrative for Sirius. Karmazin would not comment on who the automotive company was, although most suspect that it is General Motors (GM), but he did confirm that the company will begin a new contract in Q4 of 2013, which will be a huge cash stream for Sirius.
So if Liberty wants to insure the continued success of Sirius, it will keep Mel Karmazin. He is extremely popular with the OEMs, as well as the shareholders. And each day, as more questions about the Liberty takeover are answered, Sirius stock becomes more valuable. And once the buyback is announced, the price per share will jump very quickly. Keep in mind Liberty does not need FCC approval to begin a buyback. It only needs the approval of the Sirius XM Board.
Disclosure: I am long SIRI.