If you are invested in Liberty Media (NASDAQ:LMCA), you are likely well aware of the intent of the company to gain control of satellite radio provider Sirius XM (NASDAQ:SIRI). This saga has been playing out ever since Liberty saved Sirius XM from near bankruptcy in 2009 and was awarded 12,500,000 preferred shares that equate to about 40% of Sirius XM once converted.
Liberty Media has spent the better part of the third quarter amassing shares of Sirius XM and has even converted just under half of its preferred shares into common shares. Liberty CEO Greg Maffei has expressed that Liberty Media can be patient with its Sirius XM intentions, and for good reason. There is a lot of profit potential, leverage, and share buybacks that will benefit both shareholders and Liberty Media.
Liberty Media has penned a letter to the FCC, where it informs the agency of the fact that it has converted some preferred shares and goes on further to state that it does not plan any action to replace the current Board of Directors prior to the next annual meeting. The exact wording used is:
Pending Commission review and approval of its applications, Liberty Media presently does not intend to take any action to replace directors of Sirius with its own designees prior to the next regularly scheduled meeting of Sirius shareholders. However, under Sirius' bylaws, Liberty Media will be required to name its slate of nominees no later than March 13, 2013.
There are many things in this statement that are worthy of discussion, but most of that would simply be noise. Having said that, and knowing the Sirius XM investment community, it might as well be addressed before moving on to some other scenarios.
The first item to note is the very specific language used here. Notice that the first sentence starts off with, "Pending Commission review of its applications, Liberty Media presently does not intend to take any actions to replace directors at Sirius..."
Breaking this down, it could mean that Liberty does not intend to replace the Board until the FCC approves, and will not take any action while the matter of de jure control is pending. Of course, it could also mean that Liberty has no intention of any action until the next shareholder meeting. Do you see the "noise" that can happen here?
Removing that noise, let's look at why Liberty may not want or need to act until that time.
We all know that the company needs to start using its stockpile of cash. We also know that there are issues such as the 7% convert notes that carry potential to dilute the company, and thus dilute Liberty Media. In fact, there are enough shares tied to convertible notes, warrants, options, etc. that Liberty could be diluted out of a majority position.
While there is one school of thought that has Liberty buying more shares to make it immune to the dilution (in terms of control), it is my belief that the more likely path is that share buybacks will happen that increase the Liberty stake enough to make it immune. From a Liberty perspective, would they rather use their own cash to make that happen, or let Sirius XM cash do the work? My answer is that Sirius XM cash will do it, and what better way to have that happen than via the current Board rather than one hand selected by Liberty. There are no right or wrong opinions here, just great discussion about possibilities.
The big point here is that Liberty Media has plenty of time. There is no hurry to get to the finish line on a Reverse Morris Trust, or even a spin-off of its stake. The reasons:
1. Liberty has expressed a desire to get back the cash used to raise its stake above the 40% represented by the preferred shares via a share buyback or dividends. That amount of cash will be between $1.5 billion and $2 billion. It will take time for that to happen.
2. Liberty wants to participate in the growth of Sirius XM. It does this by tackling its time on actions.
3. Liberty feels that Sirius XM can lever itself (take on more debt) further. Liberty used a ratio of 4.5 to 1 on a debt to EBITDA ratio on its Liberty Global (NASDAQ:LBTYA) deal with Telenet (TNET.BR).
4. Liberty can wait until next year to insert a board and leave the "dirty work" to the current board, which is essentially backed into a corner at this point.
The first months of a transition in control, and the actions taken, will be closely watched. There is no shortage of people out there looking for a reason to launch a class action suit. While such suits likely will not go far (some have already come and passed), they are a headache. By allowing the current board to be in place, Liberty can sort of insulate itself from the decisions regarding share buybacks that will keep Liberty in a controlling state of existence. In addition, it can remove itself from negotiations with current CEO Mel Karmazin, whose contract expires at the end of this year.
Essentially, Liberty Media has already outlined that the process of getting all of its proverbial ducks in a row will take up to two years. There is no need to rush on the Board of Directors issue, and in fact, some very good reasons not to rush. Certainly there will be some interesting times coming up in the next six months, but all of those events are simply leading up to bigger ones a year from now.