The saga of Sirius XM (SIRI) and Liberty Media (LMCA) took a new turn toady as it was announced by Liberty Media that the company had converted just under half of its 12,500 preferred shares into common shares at a conversion rate of 209.9581409 common shares for each preferred share. The move adds 1,293,467,684 to the share count and substantially increases the number of common shares held by Liberty Media.
By converting less than half of its stake, Liberty Media retains 3 of its 5 board seats as well as the "veto" powers that the preferred stake grants. Those "veto" powers include rights over the use of cash beyond specified limits, debt issues beyond certain limits, and issues surrounding share dilution beyond certain limits. Essentially Liberty Media is in preparation mode for gaining de jure control of Sirius XM.
The latest 13D filing would seem to indicate that Liberty Media was not buying shares of Sirius XM on the open market over the past couple of days. The reported stake of Liberty Media with the latest information is now at 49.5%, down from the 49.6% indicated last week. This can be explained by a dilution of 1,489,284 shares in some manner since last week.
Clearly Liberty Media is in cruise control as it gets ready to move in and take over Sirius XM. The company has made good on everything it said it would in the de jure control application with the FCC.
There will likely be some that will notice some substantial changes in the way financial sites report Sirius XM metrics such as market cap. Long term investors have always considered the Liberty stake on an as converted basis, but many financial sites did not. It is the reason why some sites carried a market cap of around 10 billion when it was actually closer to 15 billion.
While the concept of over 1 billion shares hitting the theoretical market may seem like massive dilution, it is not. Liberty is holding these shares, as they are needed to garner control. There may be a point in time when the availability of these shares may carry a negative impact, but that is when only when and if Liberty spins off its stake and Liberty investors hit the sell button.
The big question may be whether or not this filing represents the end of Liberty Media buying Sirius XM stock on the open market. I had written that when Liberty does stop buying that a correction could come as a result of Liberty no longer propping up the price of the stock. While some were very critical of me saying that, it appears that is exactly what is happening. It is simply a law of supply and demand.
Yes, Liberty wants to see its investment appreciate like everyone else, but Liberty has some other "benefits" that we do not. Much of that benefit comes in the virtually free stake Liberty got in Sirius XM when it bailed the company out in 2009. In point of fact, the average price per share for Liberty Media is a modest $0.43! If you look at the common shares Liberty bought prior to this conversion, they average $2.26. Liberty has room for a technical correction and it will not change the longer term dynamics of the company.
What investors need to be aware of is how this conversion will be reported in the press and absorbed by the street. It is too early to tell whether it will carry any real impact. One thing is certain, if you are invested in Sirius XM, Liberty, or both, you will want to be paying attention to the news wires.