Dissecting SIRI's agreements with Liberty...

This really deserves a thread of it's own. The new deal with Liberty needs to be gone over with a fine tooth comb....

SEC Filing

Here are Newman's comments from the intraday thread....

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Originally Posted by Newman

Ok, here we go.

Phase One: This is known as the Sirius Credit Agreement. $280 million dollar credit agreement. Interest is 15%, matures December 20th, 2012. They immediately drew all of the credit, paying 30 million as a setup fee, and 250 million to pay off debt and "corporate expenses". This part is DONE.

Phase Two: Sirius XM agrees to give out 12.5 million in preferred stock (The "Investment Agreement"), which can be exchanged for 40% of the company in common stock. In exchange, Liberty Media will give XM a credit line of $150 million and agrees to buy up $100 million of bank notes due in May 2009. This portion is known as the XM Credit Agreement.

The way the filling is written, it sounds like the preferred stock is given out IF AND ONLY IF Sirius draws under the "XM Credit Agreement."

In addition to this, there is a clause that states: After April 15, 2009, we may terminate the Investment Agreement if our Board of Directors determines it is in our best interests to do so. This means that if they are able to secure more favorable financing somewhere else, they can terminate this deal with Malone and never have to give up 40% of the company. Of course, if they terminate the "Investment Agrement", the Sirius Credit Agreement can be called back for 105% of face value, or $294 million plus a $7 million cancelation fee.

So basically: Malone came to the rescue, and we as shareholders have the potential of getting screwed but we stave off bankruptcy for now. If the economy improves and banks start lending again, we could buy back our debt (and our company) and have lost nothing but a bit of time and about 51 million dollars.

This is "ugly financing" but with a loophole out of it. The key issue here is the economy. Will Sirius XM be able to refinance debt before they have to draw on that extra 250 million? It looks like the Sirius Debt Refinance Search continues... as will the drama of this stock.

Homer or anyone care to correct anything I may have misunderstood?

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Originally Posted by Newman

Of course, if they terminate the "Investment Agrement", the Sirius Credit Agreement can be called back for 105% of face value, or $294 million plus a $7 million cancelation fee.
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What's the time frame on that? When would they have to pay the $301 million to Liberty?

This form the SEC filing....

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The preferred stock is convertible at any time, at the option of the holder, into shares of our common stock equal to 40% of our outstanding common stock (after giving effect to such conversion).

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When might this dilution of the common take place? How much notice (if any) would be given? Would it be baked in, as if the stock had already been diluted, with the issuance of the preferred?

with how this stock acts on negitive news I say it gets baked in twice. Think it held it back yesterday and when/if they annouce it we will get hit again IMO.

Demian: I don't think we get any warning. We will know when the perferred shares get issued because an SEC filing will have to be made. According to law, a certain time period must pass before they can convert. But the shares only convert if Malone wants them to, and we will not have any warning on that. And this dilution, while it should be baked in once the stock stabilizes, will get baked in again when it happens. It's the nature of Sirius unfortunately.

As far as the 301 million, that would only have to be paid if Sirius cancels the investment agreement that gives Malone 40%of the company. Basically they would have to get a large loan to cover all outstanding 2009 debt plus 301 million. Malone doesn't HAVE to call the loan in, but my guess is he used this clause to make it more difficult to cancle the investment agreement

http://dealbook.blogs.nytimes.com/20...s-last-chance/

Parsing Sirius XM’s Form 8-K (Sirius’s Last Chance)
FEBRUARY 18, 2009, 1:30 PM
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. His columns are available at The Deal Professor blog.

Distressed deals are sausage. The panic-driven negotiations of the distressed company and the leverage of its savior often work to create both extreme and unusual provisions.

So, it is with this hope that I perused the press release of Sirius XM Radio announcing that Liberty Media would provide up to $530 million in loans to Sirius XM and receive a 40 percent stake in Sirius.

The press release was disappointing and quite short on details about the transaction. Sirius, however, also filed a Form 8-K with the Securities and Exchange Commission on Wednesday disclosing the announcement of the transaction. This is typical. Also typical was Sirius’s fuller description of the transaction in the Form 8-K itself. It was here that my search yielded some fruit.

First, the deal is divided into two separate transactions. The first is a credit agreement for a $250 million term loan and $30 million of purchase money loans between Sirius and Liberty Media. The $250 million loan was funded Wednesday. Both loans bear an interest rate of 15 percent a year and mature on Dec. 20, 2012. The interest rate is reflective of the distress of Sirius and the risk that Liberty is taking. In fact, Sirius used these funds to repay its $175 million in convertible notes that also came due on Wednesday.

The more interesting transaction is the second one. This is a credit agreement between Sirius’s subsidiary, the old XM Satellite Radio, and Liberty Media. The XM Credit Agreement provides for a $150 million term loan with an interest at a rate of 15 percent per annum, maturing on May 1, 2011.

Unlike the first loan, this second loan does not close immediately. Instead, the funding is subject to several conditions. These include the renegotiation of XM’s other credit agreements to extend their terms and Liberty Media’s going out and purchasing in the market another $100 million of this debt.

The second loan is also conditioned on Sirius’s auditors not issuing any “going concern” opinion on the company with respect to its 2008 audited financials. A “going concern” caveat in an auditor opinion is code that a company is likely to go bankrupt without additional financing.

In connection with this second loan, Liberty is receiving a 40 percent interest in Sirius. Here, I was surprised that no mention of a shareholder vote was in the press release or the Form 8-K. Nasdaq MarketPlace Rule 4350(i) requires a shareholder vote when a Nasdaq-listed company issues common stock or securities convertible into common stock with a 20 percent or greater voting power.

But there is an exception that was used in the Bear Stearns and Wachovia deals under a similar New York Stock Exchange rule. A company can forgo this shareholder vote if “the delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise.” I assume Sirius is relying on this exception, but if the company is going this route it is not highlighting it.

In addition, there is no explanation for why 40 percent, but I assume that it had to be below a controlling stake in order to avoid violating covenants on Sirius’s other debt.

The mechanics of the issuance of the 40 percent stake in Sirius is where it gets interesting. Liberty Media is receiving 12.5 million shares of convertible preferred stock in Sirius in connection with the loans. Upon antitrust clearance, the stock becomes convertible into common stock of Sirius.

However, the preferred stock is only issuable upon the satisfaction of the conditions to funding the XM loan, the second loan.

The result is that Sirius has a period of time during which it can find an alternative transaction. Here the form 8-K states that:

If, prior to April 15, 2009, we receive an alternative proposal that our Board of Directors concludes in good faith is a Superior Proposal … our Board of Directors may terminate the Investment Agreement in order to transact the Superior Proposal. After April 15, 2009, we may terminate the Investment Agreement if our Board of Directors determines it is in our best interests to do so…

“Superior Proposal” is defined in the Form 8-K as:

a bona fide written alternative proposal that our Board of Directors in good faith determines, after consultation with its legal and financial advisors, would, if accepted, be reasonably capable of being consummated, taking into account legal, financial, regulatory, timing and similar aspects of the proposal and the person making the proposal, and would, if consummated, result in a transaction more favorable to our stockholders from a financial point of view than the transaction contemplated by the Investment Agreement.

So, the parties have created a rather intricate structure that unwinds if a superior proposal is made and accepted before the stock issuance under the investment agreement. If such a proposal is made and accepted, the stock issuance and the second-phase loan do not occur. Liberty is also entitled to a $7 million termination fee. In addition, if a superior bid is successful, Liberty can demand that the first loan be repaid with a $14 million premium.

The end result is that while the bidding for Sirius looks over, it might not be. Sirius has negotiated an out if a superior bid is made before the second loan closes. By putting this announcement in its Form 8-K Sirius is acting to alert the world.

The agreements for this transaction have not yet been filed with the S.E.C. In fact, they are probably still being negotiated before the deadline for filing, which is next Monday. We will know then how large the opening Sirius has preserved for itself. I suspect there will be more surprises and tricks as the lawyers struggle for every advantage.

Ultimately, though, the Sirius precedent shows that even in a distressed situation, a target can negotiate some possible out. The question I have is whether Sirius was able to do this because of bargaining leverage or an argument under Delaware law that this was necessary. The standard the Delaware Chancery Court would likely apply here would be Unocal. This requires that a board not act in a preclusive or coercive nature and that its response be reasonable in relation to the threat posed.

Here, the threat would either be corporate bankruptcy or an intervening bid. Given Sirius’s distressed situation and the 40 percent threshold, Unocal review if it applied, would likely be satisfied. This may be another reason for the 40 percent number — it prevents an argument that this issuance was preclusive or coercive.

Ultimately, though, I can’t see these parties (Mel Karmazin, the chief executive of Sirius, and John C. Malone, the chairman of Liberty) caring too much about this risk. Still, the lawyers may have played it safe.

Mel is a genius plain and simple. The man knows radio like no other and can wheel and deal like no other. Add Malone to the picture and you got a f'in juggernaut, i think what Mel lack's Malone has in drove's and vice versa, perfect fit.

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Originally Posted by Demian

What's the time frame on that? When would they have to pay the $301 million to Liberty?

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2012 right? even if sirius backs out of the second half. If all else fails then malone has simply made a good investment in the form of a loan with quite a good return, if all works out malone get's to sit on the board and have a significant stake. It's not that complicated :/

that article is a great read.

You understand if all this goes as Malone plans it when the first loan matures he will have a minority stake in the company so you think he's not going to work out a better deal or hell even retire it knowing its going to make siri more profitable and in term himself more profitable? The media like they always do will find flaws in everything involving siri, its what they are paid to do. They're have been some good article's though unlike usual like this one

http://www.politicallore.com/uncateg...h-the-risk/504