With the news surrounding Direct TV and Liberty, we once again have discussion about Liberty’s investment into Sirius XM. Among items on the table is that the Liberty deal with Sirius XM can be reversed for a 5% premium. The clarity that is needed is that it is the LOAN (Phase 1) portion of the Liberty deal that can be bought off at a 5% premium, and not the 12,5000,000 preferred shares (phase 2) that Liberty has.

Simply stated, Liberty owns the 12,500,000 shares outright, and there is no mechanism calling for the company to buy them back at a 5% premium. The 5% premium applies to the LOAN. Additionally, the company would need the cash in order to make such a move, and they do not have that kind of cash on hand. Yes, dilution is a possibility, but there are terms within the deal that protect Liberty from certain amounts of dilution.

The only mechanism that could possibly reverse the 12,500,000 preferred shares is if Liberty were to default on the $150 million dollar payment in December that is a part of the phase two agreement. Given the substantial gain in value already for Liberty, they would be foolish to not pony up the dollars.

Investors need to break the SEC filing on the subject down into its respective parts. There is nothing in the agreement that would compel or force Liberty to sell back those shares unless they are willing to do it. That being said, a separate deal could be worked out if both Liberty and Sirius XM desire one, but as yet such a deal does not exist.

Position – Long Sirius XM, No Position Liberty