As many investors are aware Liberty Media (LMCA) is in the midst of trying to gain control of Sirius XM (SIRI). The process actually started 3 and a half years ago when Liberty essentially saved Sirius XM from bankruptcy by loaning the satellite radio outfit just over $500 million so that Sirius XM could take care of certain debt obligations. In return for the loan, along with a healthy interest rate, Liberty Media got 12,500,000 preferred shares of stock that could ultimately be converted into about 2.587 billion shares of common stock (about 40% of the company). The deal between Liberty Media and Sirius XM contained certain stand-still provisions. Those provisions all expired in March of 2012.
The situation between Liberty Media and Sirius XM is quite complex, can take several routes, and is the subject of most of the questions I receive about Sirius XM. Before moving forward there are some things that need to be outlined and understood.
- The Liberty Media preferred shares carry certain "veto" rights with regard to the activities of Sirius XM. These rights include the use of cash beyond specified limits, additional debt beyond specified limits, and actions that change the share count beyond specified limits. These rights were all integrated to protect Liberty Media and its substantial stake in Sirius XM.
- Liberty Media maintains these rights as long as they hold at least 6,250,001 shares of preferred stock.
- While Liberty has converted almost half of its preferred stake, it still maintains enough preferred shares to keep a right in force.
- Liberty Media has committed to the FCC that it will convert the balance of its preferred shares within 60 days of the commission granting Liberty Media de jure control of the licenses associated with Sirius XM.
With the FCC having now accepted the Liberty Media application for de jure control we have some new dates to consider. There is a comment period, opposition period, and a reply period. The comment portion of the FCC timeline extends through November 20, 2012. Thus, the EARLIEST that the commission could render a decision would be November 21st. That is quite unlikely but I will use December 1st as a baseline for some points top consider.
- Assuming that Liberty waits a full 60 days to convert the balance of its preferred stake, the earliest possible conversion date would be February 1, 2013.
- In theory, as early as February 1st, Liberty would possess over half of the common shares of Sirius XM.
- Liberty Media can actually wait on technical "control" (by SEC standards) by sitting back and not converting its remaining preferred stake.
By waiting on converting the remainder of its preferred stake, Liberty can allow the current board to take on the work of buying back shares or issuing dividends. This allows Liberty to begin recouping some of the $1.5 billion invested into Sirius XM common shares (a stated goal), while also giving the company the flexibility to either participate or not participate in the buyback process.
Why Would Liberty Not Participate (Sell Shares)?
The first answer to that question is obvious. By not participating in a buyback the Liberty Media percentage of ownership in Sirius XM would increase. However, this flies in the face of the stated goal to recoup money. The reason Liberty may want to be selective in how much they participate is to insulate itself from possible dilutive activities. One such activity is the 7% convertible notes which can be turned into almost 300 million shares or more.
For the purpose of discussion I will use the 300 million share figure. If the holders of those notes convert, then it is possible a Liberty stake will dip below 50%, an event that Liberty would not want to happen. If Sirius XM were to announce a share buyback of 300 million shares, and Liberty did not participate, then its ownership stake would increase to a point where the convert shares entering the market would not impact the 50% level. The same situation would hold true for other issues as well. Another example would be the Mel Karmazin option shares. In essence Liberty wants to be at between 54% and 55% ownership in order to offset any dilutive activities. They get there by sitting out on some of the share buybacks and allowing Sirius XM money to raise its stake rather than additional Liberty money.
Another reason that Liberty may not participate is that it may want to have its stake increase. Right now Liberty has latitude in differing paths. While a Reverse Morris Trust is certainly on the table, there could be other dynamics that would argue for an outright takeover some years down the road. Simply stated, Liberty has options and will likely deploy strategies that maximize options as well as potential profits.
Why Would Liberty Want To Participate In Share Buybacks?
The main reason, at least initially, is to get the $1.5 billion invested into common shares back out. Liberty has stated that this is a goal. After the company insulates itself from dilution possibilities, it could well want to be an active player in selling shares, but only at a rate that would not bring the control percentage below 50%.
For Liberty, one advantage is that it will likely not need to sell all of the 700 million or so shares of common that it took to get to 50% to get back $1.5 billion. As long as the share price during buybacks is higher than the $2.26 average paid, Liberty can sell back less shares and hold.
Knowing exactly what path Liberty will take is not an exact science. This process will take time, and dynamics can change. When it will get interesting, and when we can gain a bit more insight on the longer term plan is when Liberty Media gets to the point of being insulated from dilution taking it below 50%. Once there, we will be able to see if Liberty is then trying to increase its stake, or is instead trying to maintain its stake.
While there will certainly be news over the coming months that will hint to the intentions of Liberty, there is really nothing that carries certainty until at least February of next year. Liberty can afford to be patient here, and at least until the time when Liberty gets to a decision point, the Liberty agenda would seem to align with the Sirius XM agenda. Stay tuned and watch closely.
Disclosure: I am long SIRI.