Satellite radio has had a hard time trying to get Wall Street to side with it. It seems as if it has been a fight to convince the Street that the popularity of satellite radio can also be profitable. Sirius XM (SIRI) may find that boost from the recent move by Liberty Media (LMCA). The relationship between the two companies has been well-documented, but Liberty has raised its share holdings from 49.2% to 49.7%. With that move there could be a challenge to the board of Sirius XM now.
Sirius XM CEO Mel Karmazin's contract will expire by the end of the year. Part of the timing of buying the shares now may have to do with replacement strategies. Liberty Media CEO Greg Maffei has even suggested that it may be time for Sirius management to see a shakeup. Karmazin suggested that Liberty Media replace the board after it gains control, and he may not be staying on. But this may be a good thing for investors. John Malone, who heads up Liberty Media, is a fierce competitor and has done well with the company. Can it make money? Obviously Malone thinks it can, and this may sit well with investors.
It will only be a matter of time before Liberty Media has full control. Not long ago, Liberty Media filed a new application with the FCC stating its intent to take over more than 50% of Sirius so it can control the entire board. Has this been Liberty's intent all along? Back in 2009 at the height of the recession, when Sirius radio struggled financially because of the slowdown in auto sales, Liberty stepped in with a half-a-billion-dollar loan that also gave it a 40% stake in the company through preferred stock.
Liberty's timing in all this looks too orchestrated to be random. Sirius had robust financial results for the second quarter of 2012 with record high revenue, EBITDA, free cash flow, and net subscriber addition. It raised its financial outlook for the second half of the year, and things seem to be going well for the company at the moment. As we inch closer to the end of Karmazin's contract, it appears Liberty is slowly putting the squeeze on the company -- delicately moving its way in for final control.
Not everyone is happy, though. A lawsuit, filed in the Court of Chancery in Delaware by the City of Miami (Florida) Police Relief and Pension Fund, came just days after Liberty said it planned to take full control of Sirius and its board by increasing its stake in the satellite radio operator to more than 50%. They feel the Sirius board did not do enough to fight the takeover that Liberty is moving into. As part of the loan, Sirius' board agreed not to adopt a poison pill or any other defense measures against a Liberty takeover after a three-year standstill.
Maybe this is something that will be really good for shareholders. Could it be that Karmazin will stay and run the company with Liberty's deeper pockets? Don't forget that he still owns 69 million shares of the stock -- what happens to the value of those shares if he leaves? As an investor, do you think Malone or Maffei have the expertise to run Sirius profitably? Karmazin is the man for the job, and helped the company turn itself around with the influx of money from Liberty. So what's really going to happen?
I think Karmazin will come to an agreement to stay on and run the business, and Liberty will take a backseat approach to the ride (to a point).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
