The subject and concept of a Reverse Morris Trust has been a matter of discussion for months now regarding Liberty Media (LMCA) and Sirius XM (NASDAQ:SIRI). Even though officers of both companies have brought up the subject from time to time there are still many investors who simply think all of this Reverse Morris Trust mumbo jumbo is hyperbole. Now there is yet another indication that a Reverse Morris Trust is exactly what Liberty Media has in mind.
As most savvy investors already know, Liberty Media has preferred shares that give it specific rights with regard to the actions of Sirius XM. These rights include the ability to limit cash expenditures beyond certain levels, limit debt issues beyond a certain amount, and limit the issuance of shares beyond a certain amount. In essence Sirius XM cannot make a substantial move without "permission" from Liberty Media. These rights, and the board seats connected to the preferred shares, make those shares quite valuable.
Very recently Sirius XM did a new debt offering of $400 million in 5.25% notes due in 2022. The intent of that offering was to pay down some of the $686 million in existing "toxic" notes that carry a hefty 13% interest rate. This debt offering needed the blessing of Liberty Media to happen.
On August 14th, Sirius XM filed an 8K with the SEC that gives us some insight into these notes. I quickly opened up the filing to digest what was contained. One mission was to see the restrictions on the notes specific to a change in control. It is no secret that some of the smartest money on the street is placed in the bond market and not stocks. These bonds offer massive protections to the holders, and change in control is often one protection afforded the bond holders. In many cases, a change in control triggers making the debt immediately callable.
Contrary to what some may believe, all of the debt issues incurred by Sirius XM since Liberty Media became involved with this equity have a protection in the change of control clause that makes a change of control to Liberty a non-callable event. There will be no run onto Sirius XM demanding immediate payment if Liberty Media takes control.
In this latest filing we see once again the protections offered by a change of control to Liberty Media. What we also see is very specific language relating to a Reverse Morris Trust. Page 56 of the new $400 million offering states:
"For the purposes of Section 4.10, a distribution of capital stock of the company by Liberty Media Corporation, Liberty Radio LLC, or any of their respective Affiliates to their shareholders on a pro rata basis, or any earlier or related transaction if furtherance thereof (as, for example, in connection with a Reverse Morris Trust transaction or otherwise), is not intended to be a "Change of Control" under this indenture."
What does this mean? It means that Liberty Media was very specific in approving this debt issue, and further very specific about the concept of a Reverse Morris Trust. It also means that those looking for another buyer to swoop in and offer $3.00 a share to take over the company should think again. Another buyer would have massive hurdles that simply do not exist for Liberty.
As we all know, Liberty carries a substantial position in Sirius XM. They are at just over a 48% stake now when the preferred shares, common shares, forward purchase shares, and converts are considered. Essentially they are on the cusp of de jure control. In all likelihood, if de jure control is the goal, Liberty would need to take its stake to 54% to cover the other convert shares that exist. However, there is another twist.
A Reverse Morris Trust calls for a larger company to be merged into a smaller company with the smaller company being the surviving entity. The common assumption is that Liberty will need to go to an ownership stake above 50% in Sirius XM, spin off that stake and then merge it with the existing Sirius XM. Alas, that is but one way to skin the proverbial cat. Another way to accomplish a Reverse Morris Trust would be for Liberty to take its 48% stake in Sirius XM and combine it with its 25% stake in Live Nation and then spin it off. This would present a company that is larger than the existing Sirius XM. A negotiated merger could then be accomplished.
The key with all of this is that a Reverse Morris Trust, and not the Net Operating Losses, is the goal of Liberty Media. There are situations that could have Liberty having to take its proverbial stake up to 54%, but on the flip side there are situations where Liberty may already have all of the shares it needs. It is a fine line that could provide an impetus for the stock to run in one situation, and a reason for the stock to settle down in the other. Savvy investors prepare for these times.
What we know for certain is that Liberty Media ensured that Reverse Morris Trust language made its way into this filing. Food for thought.
Disclosure: I am long SIRI, LMCA.