Liberty Media Shareholders Approve Split-Off - What It Means for Sirius XM

Includes: FWONA, SIRI
by: Spencer Osborne

Liberty Media (LCAPA) shareholders recently approved a split-off of LCAPA. (Liberty Capital), the company in which Liberty accounts for their investment stake in Sirius XM Satellite Radio (NASDAQ:SIRI). It is well known that Liberty Media is a major shareholder in Sirius XM. In 2009 the company registered their 12.5 million preferred shares which can be converted into roughly 2.586 billion shares of SIRI common stock. Considering the current outstanding share count of SIRI the Liberty stake equates to about 39.56% of the company.

What this split-off event means is that the Liberty stake in Sirius XM is now being split off and will trade in a tracking group as a separate public company from Liberty Media. The tracking group, called Liberty CapStarz, Inc. will include Starz Entertainment, LLC, Starz Media, LLC and Liberty Sports Interactive, Inc., controlling interests in Atlanta National League Baseball Club, Inc., TruePosition, Inc., as well as minority investments in Sirius XM Radio Inc., Live Nation Entertainment, Inc. and Sprint Nextel Corporation.

The latest Liberty quarterly report states, "The proposed split-off will be effected by the redemption of all the outstanding shares of Liberty Capital tracking stock and Liberty Starz tracking stock in exchange for shares in a newly formed company ("Splitco"). Splitco will hold all the assets and be subject to all the liabilities attributed to the Liberty Capital and Liberty Starz tracking stock groups. The common stock of Splitco will be divided into two tracking stock groups, one tracking assets that are currently attributed to the Liberty Capital group ("Splitco Capital") and the other tracking assets that are currently attributed to the Liberty Starz group ("Splitco Starz"). In the redemption, holders of Liberty Capital tracking stock will receive shares of Splitco Capital tracking stock and holders of Liberty Starz tracking stock will receive shares of Splitco Starz tracking stock. After the redemption, Splitco and Liberty will be separate public companies."

What does this mean to Sirius XM shareholders? It has many possibilities, but one of the most distinct is that Liberty could be positioning themselves to gain a controlling interest in Sirius XM and then move forward with a Reverse Morris Trust. Such action would allow Liberty to utilize about $8 billion in Net Operating Losses (NOL's) currently held by Sirius XM to offset what would otherwise be taxable gains. Of course Liberty could simply hold their stake in Sirius XM, but if they do that they are not monetizing their investment.

This issue bears watching for Sirius XM investors because CEO Mel Karmazin has stated the possibility of SIRI stock buybacks as a way that shareholders of SIRI could receive benefit from the profitable position the company now finds itself in. As early as March 2012 Liberty will be free from standstill agreements that limited their ownership stake in Sirius XM to no more than 49.9% of the company. In addition, IRS restrictions on NOL's will expire meaning that they could flow through. If Liberty see's value in those NOL's (and they certainly would), then they have the ability to make a move.

Should Sirius XM initiate a stock buyback program, and Liberty chooses not participate in tandem, the impact could be that the Liberty stake in Sirius XM would grow on a percentage basis, in effect getting them closer to a majority position than they otherwise would have been without the buyback. This fact seems to still confuse many shareholders, despite CEO Mel Karmazin addressing the Liberty stake specifically in answer to a shareholder question, and despite SEC filings indicating that the Liberty preferred convert to common at a specific rate with bolier-plate adjustments for stock splits, etc.

While a stock buyback program has not been laid out by Sirius XM, it has oft been discussed over the past few quarters, and is a potential reason that some may be investing into the company. The importance here is simply understanding the dynamics of how a stock buyback interrelates to the Liberty stake, and what will happen next March when Liberty is free from their standstill constraints.

The prospect of Liberty potentially taking a majority stake in Sirius XM may be daunting to some passionate, dare I say "cultish," investors, but if it happens is it really all that bad? The answer is it may be could likely be just fine. Is it a bad thing when Warren Buffet takes a stake in a company? John Malone, the man in charge of Liberty, is a savvy investor who runs a tight business, and likely would be a great majority holder of Sirius XM should he decide to take that path.

Disclosure: I am long SIRI.