Understanding The Liberty Moves
Well, when you spend years writing about and studying an equity, it is easy to sometimes assume that the readers have all been there every step of the way and understand certain aspects of a situation that for long-term readers can go unsaid. Even if someone has been reading for a long time, the nuances of this equity can sometimes be missed. Recently I wrote about the Liberty stake and various paths that it may take. Like clockwork, there were some that assigned their own meaning to what I wrote. I get it…It comes with the territory. Thus it is time to bring this down to the lowest common denominator so that there can be no confusion.
There is no secret that Liberty Media (NASDAQ:LMCA) is intent on gaining control of SiriusXM (NASDAQ:SIRI). It is also no secret that once in control Liberty might conduct a Reverse Morris Trust (RMT) in order to gain tax advantages. When SiriusXM CEO Mel Karmazin recently spoke at the Bank of America conference, he made a few interesting statements. One was that Liberty may not want to keep him on board. Another was that the actions of Liberty will take some time to unfold. When Liberty Media’s Greg Maffei spoke at the same conference he made a statement that Liberty is not necessarily in a hurry to do unwind its SIRI stake.
FIRESTORM
Suddenly there were people writing and sending emails, and posting on message boards that Liberty is not in a hurry, and that the company must see some value, and that Liberty wants to benefit from the “amazing” growth SiriusXM will see.
Really?
What has changed in the last few months? Did everyone really think that a Reverse Morris Trust is an overnight event? Did people really assume that once Liberty got over 50% that two weeks later we would be looking at a new company? It almost seems as if this is the belief people had given the epiphany like behavior exhibited by investors and writers.
The first thing we need to consider is the actions at Liberty’s disposal. The Liberty preferred stake gives Liberty access to about 2.586 billion shares of common. As preferred shares Liberty gets board seats as well as certain “veto” powers over shares, cash, and debt. Liberty maintains those rights as long as they keep at least half of the preferred stake as preferred shares.
If Liberty were to convert all of its preferred into common, and had enough common to take it over 50%, it could insert its own Board of Directors. It is pretty much that simple. If Liberty were to only convert half of its preferred shares, it could call for a special meeting, nominate its slate of directors, and vote its common shares like any investor. Under this strategy, Liberty could lose in that election. It would need enough shareholders to side with it to insert a new board. It takes two directors to call a special meeting. Liberty could also wait until the next annual meeting to nominate a slate and take it up for vote.
It is always a good thing to try to read between the lines, but it can be dangerous. In reading between the lines, Liberty could be saying, “we are not in a hurry because we can wait until the next annual meeting to address the issue of the Board of Directors while in the meantime share buybacks increase our stake and thus voting power.”
If you were in Liberty’s shoes the best possible situation is to gain de jure control of the licenses via the FCC while holding onto half of the preferred stake. If you are in SiriusXM’s shoes, the best situation is that the preferred stake gets fully converted, thus allowing management to not have someone with substantial “veto” power over business operations.
Liberty can be in no hurry, because what will transpire over the coming months benefits Liberty in one way or another! It is really that simple. Does Liberty want its investment to appreciate? Yes, they do. They are now in at an average cost of $0.43 per share. They have a lot of wiggle room to operate in. Even the common shares they bought are still in the money. The average cost of those is $2.26.
I made the statement that when SiriusXM begins share buybacks that there will be some that Liberty would likely participate in and some that Liberty would not. The reasons are pretty simple, and there is no conflict here. Liberty would want to step away from the first 352 million shares in a buyback to increase its stake to a level that any dilution activity such as options, warrants, or convertible bonds could bring. They would then likely step into the buybacks to sell enough shares to recover the $1.5 billion the company will have invested into common shares. They would then likely step away from the buybacks after that to see their ownership interest and thus voting power increase. This is all pretty ordinary and involves no conspiracy or violation of SEC regulations or anything as dramatic as that.
Sometimes simply stepping back and using common sense trumps everything else. It is what I did when I sold half of my SIRI and bought LMCA a few months ago.
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Spence,
With respect to Liberty keeping half of their preferred shares, as some have suggested, I don’t believe that is any longer any option. I believe that in the last filing with the FCC they committed to converting all their preferred shares to common within 60 days of FCC approval of de jure control. It follows that the FCC would make de jure control conditional on Liberty delivering on their commitments, assuming the FCC approves it in advance of Liberty actually getting over 50% of the common shares outstanding, including that conversion of preferred.
When Liberty does finally get around to selling its Sirius common back to Sirius, to be assured that they participate in the buyback, Sirius could tender at a price that is under the market price – others shareholders might be more reluctant to offer their shares at below market prices, whereas Liberty’s goal would be to recover the cost of that last 10% of purchases, which you’ve indicated is around 2.26. Sirius may not tender at all, just making open market purchases as Liberty has done in the last month, providing support for otherwise natural selling.
This idea some have that Sirius is going to tender shares a some above market price just seems foolish – it might be good for shareholders that want to sell into that tender, but it would be bad for shareholders that want to hold longer term, because it means the FCF and debt is being used to buyback at a higher price than necessary. Management should be sued by shareholders if they do an above market tender for shares – it would be irresponsible and would be telling if Liberty was also participating in that buyback of that nature.
Too many retail shareholders are thinking Liberty’s purchases and a Sirius buyback are going to unleash a huge run up in Sirius share price and ignore the history of most company buyback programs. While they may induce a short lived rally, the fundamentals always rule the day (which are good for Sirius), and a well executed share buyback merely provides support for the share price, rather than rallies to ever increasing highs. Liberty has demonstrated how to do it over the last few months, and if they are really looking out for Sirius’s longer term interest they will continue with that pattern.
As you’ve pointed out elsewhere, there also is the offsetting impact of increased debt that Liberty may force upon Sirius to enable a large buyback over a short period.
well they just converted half of their prefered shares so there goes that theory