Sirius XM: Liberty Media Converts Preferred Shares And Transforms Board

| About: Sirius XM (SIRI)

Sirius XM (NASDAQ:SIRI) Radio filed an 8-k with the SEC Tuesday morning concerning the takeover by Liberty Media (LMCA). The company did not waste any time asserting its control over Sirius. According to the filing, on Friday, Liberty converted its preferred shares and made some very big changes on the board which will make a lot of Sirius investors very happy. Now the board will function like any other "normal board" as Liberty loses its Preferred stock veto power:

On January 18, 2013, Liberty Radio, LLC, a wholly-owned subsidiary of Liberty Media and the holder of all of the outstanding shares of our Convertible Perpetual Preferred Stock, Series B-1 (the "Preferred Stock"), converted all of its Preferred Stock into 1,293,509,076 shares of Common Stock. As a result of this recent purchase and conversion, respectively, Liberty Media beneficially owns, directly and indirectly, an aggregate of 3,292,800,311 shares of our Common Stock, representing approximately 50.21% of all the outstanding shares of our Common Stock.

The next order of business was to revamp the "non Liberty" section of the Sirius board on the same day. The company "accepted the resignation" of three directors:

On January 18, 2013, Leon D. Black, Lawrence F. Gilberti, and Jack Shaw resigned as members of our board of directors effective immediately. The decision of Messrs. Black, Gilberti and Shaw to resign were not the result of any disagreement with us on any matter relating to our operations, policies or practices. To fill the vacancies resulting from the resignations described above and the previous resignation of Mel Karmazin, our board of directors on January 18, 2013 unanimously appointed Mark D. Carleton, Robin S. Pringle, Charles Y. Tanabe and our Chief Executive Officer, James E. Meyer, to our board of directors.

Although the filing states that these members did not "resign due to any disagreement with us", it is more than a coincidence that all three members left on the same day. As many may recall, Leon Black was known for missing Sirius Board meetings, and analysts expected his resignation. As I wrote in an article last Spring, shareholders voted to terminate him at the Annual Meeting. However, Black remained on the board until now. This is good for shareholders, because Black reportedly did not add anything to the board. How could he if he was not at the meetings? The highlighted members on the chart below are now gone. This was a smart move by Liberty, because it maintains some stability, by keeping 4 former Sirius Directors, and adding Meyer who has been an officer of Sirius since 2004:

Votes Cast For Votes Cast Against Broker Non-Votes
Joan L. Amble 1,314,936,993 152,661,673 1,629,665,622
Leon D. Black 512,411,779 955,186,887 1,629,665,622
Lawrence F. Gilberti 1,072,515,113 395,083,553 1,629,665,622
Eddy W. Hartenstein 1,417,014,485 50,584,181 1,629,665,622
James P. Holden 1,116,065,905 351,532,761 1,629,665,622
Mel Karmazin 1,407,785,376 59,813,290 1,629,665,622
James F. Mooney 1,349,614,296 117,984,370 1,629,665,622
Jack Shaw 1,115,576,299 352,022,367 1,629,665,622

As I said, the votes against Black last Spring, were anticipated due to stories about his absence at the board meetings. In a another article that I wrote, I quoted, the Wall Street Journal about these missed meetings:

The chatter is that Mr. Black hasn't attended a single meeting in the last few years, either in person or by phone. Sirius and a spokesman for Mr. Black each declined to comment. Of course, Mr. Black is a busy guy. He still runs Apollo as chairman and CEO, sits on boards at several other companies, and has trustee roles at the Museum of Modern Art and the Metropolitan Museum of Art. But given Mr. Black was paid $70,000 in Sirius option awards in 2010 - the last year so far disclosed - investors may want to start taking attendance.

The other Board Members were controlled by Liberty through the Preferred Stock, and it voted to keep the same Directors at the same Annual Meeting last Spring:

Our Convertible Perpetual Preferred Stock, Series B-1 (the "Series B-1 Preferred Stock"), does not have the right to vote with the holders of our common stock on the election of common stock directors. The holder of the Series B-1 Preferred Stock is entitled to designate and elect members of our board of directors pursuant to the Certificate of Designations of the Series B-1 Preferred Stock. The holder of the Series B-1 Preferred Stock has designated John C. Malone, Gregory B. Maffei, David J.A. Flowers, Carl E. Vogel and Vanessa A. Wittman to serve as members of our board of directors until their successors are duly elected and qualified. The "Series B-1 Preferred Stock" holder, Liberty Media voted to keep the same five members that represent the company's interest on the board for now.

So we should expect that Liberty will keep these same members now. According to the 8-k mentioned above, except for Meyer, the new board members that were appointed last Friday not only have very strong ties to Liberty, but they are current and former employees and/or Directors of Liberty and/or its holdings. Here is a list of some of the positions they hold (and have held) for the Media Giant:

Mark D. Carleton has served as a Senior Vice President of Liberty Media since May 2007, and as a Senior Vice President of Liberty Interactive Corporation (LINTA) since December 2003. Carleton currently serves as a director of Live Nation (NYSE:LYV) and Barnes & Noble (NYSE:BKS) which are both companies held by Liberty.

James E. Meyer is the current Interim Chief Executive Officer of Sirius. He previously served as the President of Operations and Sales for Sirius, and has been with the company since May 2004.

Robin S. Pringle has served as a Vice President of Corporate Development at Liberty Media and Liberty Interactive Corporation since January 2013. She also served as a Director of Corporate Development at Liberty Interactive Corporation from January 2010 to December 2012, and as a Manager of Corporate Development from July 2008 to December 2010.

Charles Y. Tanabe served as an Executive Vice President and the General Counsel of Liberty Media from May 2007 until December 2012. He also served as an Executive Vice President of Liberty Interactive from January 2007 to December 2012 and as the General Counsel from January 1999 to December 2012. He was a Senior Vice President of Liberty Interactive from January 1999 to December 2006. He also served as the Secretary of Liberty Interactive Corporation from April 2001 to December 2007. Tanabe also serves as a director of Starz (NASDAQ:STRZA), which was just spun-off by Liberty this month.

Shares of both Sirius and Liberty have continued to climb over the last several years. And they have been significantly better investments than the rest of the market as a whole:

Chart forSIRIUS XM Radio Inc. (<a href=

What does this mean for Sirius? First of all, there are only 5 "non Liberty" Board Members left now. And they are outnumbered almost two-to-one by the eight Liberty members. This means that whatever Liberty wants, it will get. This is not too much different from the way it was before, considering its veto power due to the preferred shares, which no longer exist. That veto power made many Sirius investors nervous because the board had its hands tied. So with the restraints gone, things will probably begin to progress very fast. Many investors think that the first order of business will be to spin the company via a Reverse Morris Trust or RMT. However Liberty Media CEO Greg Maffei took that off the table for the next two years. As SA author Stephen Faulkner pointed out, Maffei said it twice:

We've had this SIRI stake for quite awhile... uhh... three, almost coming up on four years now. You know, John Malone has said someday SIRI will become an independent company and I'd be silly to disagree with my chairman who has 45 percent of the vote. But I think he's right in pointing out that doesn't necessarily mean that's going to happen in 2013 or 14... that it's somewhere down the road... you know that'll be the way it is.

...and I certainly would agree with John (Malone), someday SIRI will be an independent company... uhhh... but I don't think that's a 2013 or 2014 event.

And why would Liberty spin the company now? Most analysts expect the price to continue its upward trend. It also appears that Liberty owner John Malone expects that to continue for at least two years. So the Sirius share price should remain stable with the anticipation of the buyback, and then jump dramatically when the buyback begins. Considering that the company will buy $2 billion in stock which translates to 635 million shares at the current price of $3.15, there will be tremendous buying pressure. Currently the average daily volume is 54 million shares, so this would take at least 12 average days of volume to "execute", even if no one else was buying. And once the shares are retired, the value of the remaining shares will immediately jump dramatically, because this will wipe out 10% of the stock.

At the earnings announcement on February 5, the SEC filings will give the share count. If you are interested in buying Sirius for the first time, or adding more shares, I would do it before then. Because it will be a catch 22. If the new count shows that the buyback happened, the value of the company will jump. However, if has not happened yet, the share price will remain firm in anticipation of it. And recent history has shown that Sirius "over-delivers" on its guidance. On January 7, I wrote an article saying that we might get a dip below $3 once the buying pressure from the shorts stopped on January 18, as the options closed. Now I am not so sure that we will see $3 anytime soon.

Disclosure: I am long SIRI. 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.

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