By Brandon Matthews
It was just six months ago on February 17,2009 that Liberty Capital’s (LCAPA) John Malone stepped up and threw Sirius XM Radio (NASDAQ:SIRI) a lifeline. Critics of the Satellite Radio provider quickly pointed at the increased interest rate of 15% that Sirius XM Radio would be paying out to Liberty, as they painted a picture of an outstanding deal on Liberty Capital’s part that came at the expense of Sirius XM.
Just Friday I read a similar article which boasted of the great Liberty deal, that suggested Liberty buy out Sirius XM Radio while the stock is still cheap, and again mentioned the 15% loan interest as if it somehow denigrated Sirius XM Radio. I hate to be too critical of such things, but the information I’m about to offer is public and readily available for those that take the time to do a little research before offering misinformation as fact. Some of that information interestingly enough made headlines earlier lasts week and can still be found on the front page of a Google (NASDAQ:GOOG) news search of Sirius news, which makes it even worse.
Let’s start with the 15% interest on the loans that Liberty made to Sirius XM Radio. In the last 60 days Sirius XM Radio has completed two separate and successful bond offerings. The first was a bond offer that would be used to pay off the first part of the Liberty debt at a lower interest rate of 11.25%. The second, which occurred this week, was another offering that is to be used to pay off the second part of the Liberty loan. The interest rate on those notes is only 9.75 which is a full 5.25% lower than the interest that would have been due under the Liberty agreement. None of this has been lost on Standard & Poors, which has now upgraded Sirius XM’s credit rating for a second time this year. That upgrade will no doubt make other deals likely at even lower interest rates going forward.
With this second phase of new financing, the Liberty Credit Agreement is all but unwound, and it was unwound in only 6 short months. The media made a big deal over the initial deal, yet not a peep has been heard regarding the astonishing moves that Sirius XM has made in reducing its interest expenses by tens of millions of dollars. In fact the only part left of the Liberty Credit Agreement that remains intact is Liberty Capital’s equity stake, or rather its potential equity stake.
The media, it seems, has a hard time grasping the fact that as of now, Liberty does not have a 40% stake in Sirius XM. Liberty holds 12,500,000 shares of convertible preferred stock. Until Liberty decides to convert those shares, it is simply a holder of preferred stock. For accounting purposes, it is assumed that they will convert in the future but that is not likely to occur anytime soon, for the same reason that Liberty cannot buy Sirius XM Radio “on the cheap” at this time.
Under the agreement, Liberty cannot acquire more than 49.9% of the outstanding shares for three years from the date the preferreds were issued. The caveat to that is that after two years and in the event of a buyout offer from Liberty itself or another company that is priced higher than the closing price on the preceding day that such an offer was announced, Liberty may purchase shares which would drive up equity prices even further if another suitor joined in.
By limiting Liberty’s equity stake, this also gives Sirius XM time to become the highly profitable company most people expect it will become, which may allow Sirius XM to simply repurchase the preferred shares back from Liberty in the future, especially if Liberty decides at that time that the price tag for the Satellite Radio Provider is too high and opts instead to cash in their chips for a hefty profit. The winner in all of this regardless will be the holders of Sirius XM common stock at that time as the dilution of Liberty’s potential stake is already priced into the stock.
As Jim Cramer might say, “Sirius XM is like a lottery ticket” except that in this case, it’s like knowing the numbers in advance.
Position: Long SIRI