Is Liberty Media Battle A Dish Networks Deja Vu For Sirius XM?

| About: Sirius XM (SIRI)
This article is now exclusive for PRO subscribers.

If you are invested in Sirius XM Satellite Radio (NASDAQ:SIRI) you are certainly aware of the newly developing drama surrounding a possible move by Liberty Media (NASDAQ:LMCA) to gain control of Sirius XM. However, there are many that are newer to this equity and might not be familiar with the long and sordid story. A quick review is probably warranted:

  • In early 2009, the financial world was in a mess and Sirius XM was teetering on the edge of bankruptcy. With debt issues looming and nowhere to turn, Sirius XM began entertaining possible company-saving ideas with the likes of John Malone's Liberty Media and Charles Ergen's Dish Networks (NASDAQ:DISH).

  • In February 2009, a deal was announced that involved Liberty Media. The deal would give Sirius XM much needed financial relief but come at the cost of a high interest loan and require it to give up roughly 40% of the company in the form of preferred shares.

  • The deal with Liberty had several components. Part of the deal gave Malone and Liberty board seats. Another part of the deal required that Liberty not go above a 49.9% stake in Sirius XM for three years. Those three years expired on March 6 of 2012.

  • In March of 2012, Liberty Media requested FCC filing passwords from Sirius XM, as it was going to file for the transfer of licenses to Liberty via de facto control if granted, or gain permission from the FCC to control the licenses if actual control was gained. Sirius XM would not give the passwords.

  • In April of 2012, Sirius XM responded to Liberty's paper filing saying that Liberty did not have de facto control and that the FCC should reject the Liberty application

  • Liberty Media responded to Sirius XM's rejection filing later in April of 2012 arguing that indeed it could be seen that Liberty already has de facto control.

  • April 20, 2012 - Sirius XM replies once again to the FCC regarding the control of licenses. The relationship between these companies appears to be contentious.

Now in looking at what is happening, and in contemplating what might happen, we need to rewind the clock and go back in time. Believe it or not, a current class action lawsuit against Sirius XM (Shenk vs. Sirius XM) does just that.

In early 2009, Dish Network's Charles Ergen began making substantial moves to acquire Sirius XM Debt. While that move may seem hostile in its way, it was actually brilliant in that if the Ergen end game was the acquisition of Sirius XM, he was building leverage.

In all there were three offers placed on the table by Charles Ergen. 'Ergen 1' involved a 51% stake in the company and a loan of $650 million with interest rates between 10.5% and 14%.

In the Shenk lawsuit it is alleged that Sirius XM CEO Mel Karmazin felt animosity for Ergen dating back to his days at Viacom (NYSE:VIA) and some tough negotiations between Viacom and Dish that resulted in Dish giving out Karmazin's home phone number. The suit alleges that Karmazin did not want to give up control of Sirius XM or the Board and spurned the offer favoring Malone's $530 million bail-out at 15% and a 40% stake.

At that point it could be argued that the Malone deal was perhaps better, but Ergen did not give up. Already holding a bunch of Sirius XM debt, Ergen sweetened the deal in 'Ergen 2'.

Ergen 2 offered a $725 million loan at interest rates between 12.5% and 14% and a smaller position in the company at 38%. On the face of it, the Ergen 2 proposal could be argued as superior. However, Sirius XM had already worked out a deal with Liberty but had not yet closed it. The penalty for unwinding the Liberty deal would have been millions, but there would certainly be room for debate about which deal is better. That, however, was not the end. There was a third Ergen offer. 'Ergen 3' offered up the same 38% stake, but now included financing of $825 million.

Ultimately, Sirius XM and Karmazin went with the Liberty deal. Whether Karmazin let this get "personal" or not is a matter of opinion, and is before the courts right now. Which deal was a better deal is in the eye of the beholder. You can read the latest filing in the Shenk case and decide for yourself.

What we appear to have here is a true struggle for control. The lines were all drawn three years ago, but it is only now that the reality of the fate of Sirius XM is being realized by the street. On one hand we have Liberty now at odds with Karmazin, and on the other allegations that the Dish deal offered up three years ago was superior.

What we also have now is a battle of personalities and a battle of lawyer egos. As shareholders we need to wade through all of that and ask: What is the realistic endgame here? From the FCC perspective, it is that the FCC has no real reason to deny Liberty permission to control the licenses (whether de facto or du jour). From a legal perspective we have the battle of which deal was better. The implications from all of this point to an equity that will be strife and debate over the coming weeks and months. Whether that debate is positive or negative can not quite yet be determined. There are a lot of moving parts involved.

The unfortunate thing here is that 2012 could be a picture perfect year for Sirius XM in terms of performance. With no debt issues to service, very little capex spending, and car sales returning to more normal levels, the company should be able to march upward. These control issues and egos just might get in the way. Karmazin vs. Malone may shape up to be just like Karmazin vs. Ergen. What was a company-saving deal three years ago seems to be turning into a matter that is tearing the very fabric of the company three years later. Let's hope that we can get past the Liberty issue and see a positive balance to 2012.

Disclosure: I am long SIRI.

Additional disclosure: I have no position in LMCA or DISH