For the past month and a half many Sirius XM Radio (SIRI) investors have been anxiously waiting to see the actual Liberty Media (LMCA) application to the FCC for consent to take de jure control of Sirius XM. This week, the applications were finally made available on the FCC web site. Why did it take so long, and what is the case being made by Liberty?
The Delay - Part I
The reason for the delay could be blamed simply on the Federal government bureaucracy, but there may be more to it than that. The FCC rejected the previous applications by Liberty because they were
defective with respect to "execution" and "other matters of a formal character." Specifically, Liberty Media was unable to obtain the passwords, signatures, and other necessary information from Sirius to properly file an electronic transfer of control application. Furthermore, we conclude that a waiver of basic filing requirements is not warranted, as the facts disclosed in the referenced applications are not sufficient to establish that Liberty intends to take actions. such as conversion of preferred to common stock and installation of a board majority, that would constitute exercise of de facto or de jure control.
Note the sentence "Specifically, Liberty Media was unable to obtain the passwords, signatures, and other necessary information from Sirius to properly file an electronic transfer of control application." The new filing by Liberty, although electronic, did not have a Sirius XM signature. In fact, part of the filing included a statement from Sirius XM with respect to the lack of a signature. Exhibit 1 reads:
Sirius XM intends to cooperate fully with the FCC in its evaluation of Liberty Media's applications. Sirius XM has not signed the licensee and transferor portions of the applications because it is not in possession of all the facts required to make the certifications.
For some reason Sirius XM chose to file the Liberty de jure application electronically, but refused to sign it. The statement that "it is not in possession of all the facts" seems a bit weak. Why not simply ask Liberty for any additional facts necessary to "make the certifications"? Investors need to question what took place to motivate Sirius XM enough to file electronically, but not enough to actually sign the application. Did Liberty make some promises, but not quite enough to fully satisfy the Sirius XM board? Is the board leaving itself some "wiggle room" in case of a shareholder suit?
Regardless of the reason for the lack of a signature, it could have been the reason for the delay. The first of two documents specifically addressed the lack of a signature, made a request for a waiver and was titled:
LIBERTY MEDIA'S REQUEST FOR WAIVER OF TRANSFEROR/LICENSEE SIGNATURE REQUIREMENTS FOR APPLICATIONS FOR CONSENT TO TRANSFER OF DE JURE CONTROL
This application begins:
Liberty Media Corporation ("Liberty Media") requests the limited waiver of the Federal Communication Commission's ("Commission") rules as set forth herein.
The application goes on to cite Exhibit 1 and precedents and then discusses the participation by Sirius XM. Specifically, Liberty Media wrote:
Sirius has reviewed the transferor/licensee portions of the Form 312 applications, and Sirius has prepared the transferor/licensee portions of the Form 603 and Form 703 applications. The Commission should grant this waiver request and accept the application forms without the transferor and/or licensee authorized electronic signatures because the application forms include all transferor/licensee information and Sirius has agreed to cooperate fully with the Commission in its evaluation of the applications. Liberty Media respectfully submits that this approach will conserve the Commission's administrative resources and enable each Commission Bureau to consider its respective electronic applications in the normal course.
In its concluding argument, Liberty notes that all of the required information is included and has been reviewed by Sirius XM. Liberty also points out that the "Grant of this waiver request is fully justified to enable Commission review of the application forms required of Liberty Media." The FCC agreed to the waiver. (More on this below.)
Once this was done, the FCC would than have to review the rest of the application.
The Delay - Part II
The second filing was the request for the consent of the FCC to allow Liberty to go to de jure control of Sirius XM. It included not only the signature waiver request, but also the forms necessary to describe the licenses, intentions of Liberty, corporate structure issues, qualifications of Liberty, etc. Second, since the first dismissal was also based on the failure of Liberty to demonstrate that it actually intended to take "actions. such as conversion of preferred to common stock and installation of a board majority, that would constitute exercise of de facto or de jure control," there were details of Liberty's stock purchases, ownership percentages and further details about how and when it would go to majority control. Third, and most important, was the argument that the ownership change would serve the public interest.
Generally, Liberty stated:
- It did not violate "the Communications Act or any Commission rules or policies."
- The "potential acquisition of control of Sirius will not adversely affect the "well-recognized public interest benefits" cited by the Commission in approving the Sirius-XM merger."
- That it is qualified to control Sirius XM since it had held and currently holds several FCC licenses.
- That Liberty's ownership would not adversely affect the competitive landscape. (Interestingly, the precedent cited here was the merger of Sirius with XM.)
- Information on its stock purchases, conversion of its preferred shares, ownership percentage and its intent to convert its preferred to common to get to a majority within 60 days of approval.
The application summarized the position of Liberty as follows:
For the reasons. set forth above, grant of this application will serve the public interest, convenience and necessity. Liberty Media respectfully requests that the Commission grant this application for consent to the transfer of de jure control of SiriUs to Liberty Media, so that Liberty Media may convert a sufficient number of the Preferred Shares to own more than 50% of the outstanding common stock of Sirius.
The FCC Response
The FCC response was to file a Public Notice with their preliminary findings and a request for comments. The highlights of the document are as follows.
- The title of the document in bold letters is "APPLICATIONS ACCEPTED FOR FILING AND PLEADING CYCLE ESTABLISHED"
- Regarding the waiver of signature request, the FCC noted that it had corresponded with Sirius XM and that the company had "confirmed the accuracy of the facts in the Liberty Media application which are uniquely in its ability to certify." The FCC found that little would be added by having Sirius XM sign the application and "we [the FCC] therefore grant Liberty's request for waiver."
- And, preliminary approval for the filing of the application:
The Applications have been found, upon initial review, to be acceptable for filing. The Commission reserves the right to return any application if, upon further examination, it is determined to be defective or not in conformance with the Commission's rules or policies. Final action on the Applications will not be taken earlier than thirty-one (31) days following the date of this Public Notice.
The date of the public notice was October 2nd, and most of the notice describes the time line and procedures for the filing of comments and rebuttals.
It would appear that Liberty has satisfactorily met the procedural requirements for both the filing of the applications and demonstrating a concrete plan on how it intends to take control of Sirius XM. By the time the Trick or Treaters have sorted out their loot, the initial period for public comments will be drawing to a close. The FCC will then take some time to review everything and render a decision.
The market has reacted favorably to the news, probably bolstered by positive analyst comments, and has hit new intra-day highs on Monday ($2.68) and Tuesday $2.73). Whether there is continued follow-through remains to be seen, but one thing is abundantly clear.
Liberty is now one step closer to taking control of Sirius XM.
Disclosure: I am long SIRI.
Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 and $2.50 December covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, at any time. I may also sell some of my uncovered shares at any time. I have no positions, or any plans to open positions in the next 72 hours, in Liberty Media.