Has Liberty Media Finished Purchasing Sirius XM Shares?

Sep.14.12 | About: Sirius XM (SIRI)

On Sept. 12, Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin and Liberty Media (NASDAQ:LMCA) CEO Greg Maffei both spoke at the Bank of America Merrill Lynch Media, Communications, and Entertainment Conference. Those investors looking for more clarity may have come away somewhat disappointed. Neither executive appeared ready to disclose too much, except that both seemed to accept the fact that Liberty would soon be in control of Sirius XM.

Karmazin prefaced several of his answers to questions that involved Liberty with disclaimers that he had heard or read what Liberty was planning to do, leading investors to believe that he was as much in the dark as the rest of the non-Liberty owners of Sirius XM stock. However, when discussing Liberty's ownership percentage, Karmazin did make one comment that was very interesting. He stated:

Liberty is very close to getting over 50%. They could do it in the next few days.

He continued by saying that Maffei could buy the shares today that would get him over 10% of the stock that Liberty needs for control:

... They [Liberty] don't have to wait for the FCC approval to get to the 10-plus percent. They could do that first and then they could just sit, waiting for the FCC approval.

Why Is This Significant?

Yesterday, Liberty filed a Schedule 13D, showing that it had increased its ownership of Sirius XM common shares to 569,735,799, and including the 2,586,976,761 shares underlying its preferred shares, the 41,087,753 in its forward contract and the 5,866,666 shares underlying its 7% notes, Liberty now owns 49.6% of the equity in Sirius XM. This was fairly significant, since it indicated that Liberty might be out of the market for additional shares until the FCC granted its consent to go to de jure control of Sirius XM.

I am one of those Sirius XM investors who thought Liberty would buy up to 49.9% and then wait for FCC approval. Karmazin discussed the Liberty preferred shares as equity that would not count toward control until they are converted, so as far as the FCC is concerned, Liberty owns only the 569,735,799 common shares purchased on the open market, or less than 18% of the 3,873,284,735 common shares currently outstanding.

Assuming Karmazin is correct, it is possible that Liberty could continue making purchases of another 200 million to 250 million shares before obtaining FCC consent. This would ensure the company a majority position under most circumstances. These circumstances would include the potential increase in common shares from the early conversion of the 7% exchangeable notes (convertible into more than 300 million shares on a change of control) and conversion of options by Sirius XM employees (including more than 60 million options held by Karmazin).

Summary

Liberty has already spent approximately $1.3 billion on its purchases and, including its second forward contract, nearly $1.4 billion in its pursuit of Sirius XM. Its total investment could approach $2 billion before it takes control of the board.

Assuming Karmazin is correct, it is possible that Liberty will not have to sit on the sidelines waiting for FCC consent, and could continue making additional purchases of shares of Sirius XM. This, in turn, could continue providing support for the share price of Sirius XM.

Disclosure: I am long SIRI. 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 wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.