In an issue that has been brewing for about a month, the FCC has answered the Liberty Media (LMCA) filing regarding its request for de facto control of the satellite radio broadcasting licenses of Sirius XM (SIRI). While the answer from the FCC may seem curt, straightforward and to the point, the devil is in the details.
Liberty Media now has what they need to progress to the next step in gaining control of Sirius XM. The request for de facto control was simply a maneuver to either gain such control the easy way, or get an understanding of what they will need to do in order for the licenses in question to be transferred. Liberty now has that answer.
Liberty Media essentially has to take de jure control in order to move forward for the transfer of licenses. The bottom line here is that Liberty must raise its stake from the approximately 40% they currently have to 51%. In doing this Liberty would then have the leverage they need to control the licenses.
There is little doubt that Liberty will make a move at some point. The initial request for De Facto control proves that point more clearly than anything else.
At this point what Liberty Media and Sirius XM investors need to consider is when the next move will happen, and what it will mean to both of these equities.
From The Liberty Media Perspective
Liberty Media must now make a few decisions, the first being if they want to gain control of Sirius XM. Most savvy investors believe this will be the case, so we now move on to the next steps. When will Liberty make its move and how will they do it?
Liberty has plenty of time to make a decision as to when to move. From a Liberty perspective the goal would simply be to acquire enough shares to gain de jure control as cheaply as possible. The company owes that to its shareholders. Liberty could easily work some deals out with large institutional shareholders or gain them through a tender offer. Their least expensive path is likely to be a private deal with large shareholders. The problem with that situation is that SIRI shareholders may feel spurned by not being allowed to participate in the process. They won't necessarily churn out, but they could raise issues that prolong the situation.
A tender offer by Liberty could gain the required shares with relative ease, and would allow all SIRI shareholders to participate. With Sirius XM trading at near $2.10, an offer in the neighborhood of $2.35 (a better than 20% premium) would likely do the trick. If not, Liberty has enough cash to sweeten the pot to $2.50 with relative ease.
Form A Sirius XM Perspective
Sirius XM has a few cards in this game, but nothing that could bring about an outright victory if that is the goal. Sirius XM CEO Mel Karmazin has done his public "fight" with Liberty, but the best move needs to happen at the negotiating table.
Liberty needs 51% to start a tax friendly Reverse Morris Trust. Sirius XM has to be a willing participant for such a trust to happen. Negotiating the terms of being a willing participant is where Karmazin needs to earn his money. Securing a reasonable share purchase price and merger terms will be the payday for investors, but let's not make the dangerous assumption that a $3.00 price is anywhere in the cards. Sirius XM does not have that strong a hand. Liberty can do this the nice way, or by force. If it comes down to force, the company has little ammunition to stop it.
A move by Liberty does not have to be immediate, although with Sirius XM's share price trending down it may make things happen sooner rather than later. The good news is that Sirius XM remains above $2.00. The bad news is that the company is months away from announcing anything material that can move the share price and thus increase an offer from Liberty. The timing here is not good. With the summer months rolling in, volume being depressed, and Sirius XM stuck in a range, we could see a Liberty move while Sirius XM is near the bottom.
What To Watch For
Watch for a move by Liberty if Sirius XM trends down near or below $2.00.
Watch for the Sirius XM annual meeting later this month and what transpires there.
Watch for an investment conferences by Liberty that could shed light on the matter.
Watch Liberty's use of cash, or moves that they make to increase cash.
The bottom line here is that Liberty will make a move at some point. Savvy investors are right now picking a side - LMCA or SIRI - where they think they will get the most bang for the buck. My opinion is that it wouldn't hurt to have a little coin on both sides of this transaction right now.
Disclosure: I am long SIRI.
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