How Sirius XM’s Net Operating Losses Can Benefit Liberty
Over the past week I have received many emails asking me about Sirius XM’s Net Operating Losses (NOL’s) and how the company, or Liberty could benefit from them. Readers also had many other questions, but in my mind the NOL issue should offer enough clarity for readers to also answer the other questions. Before going into great detail on how Liberty may benefit, it is important to understand what NOL’s are. In simple terms, NOL’s are losses that a company incurs. The losses are used to offset gains in subsequent years, thus reducing the tax liability of a company.
Net Operating Losses are a valuable asset, that should never be ignored. In the case of Sirius XM Radio, it is perhaps their most valuable asset. The company has billions in NOL’s that can be used going forward to offset the profitable years that many investors hope will be transpiring soon. Typically, a company buying another entity that has NOL’s will put a high value on them because of the tax benefits. The IRS has taken some of the wind out of NOL values by enacting rules that take away NOL’s with changes of control. This is part of the reason the agreement between Sirius XM and Liberty limits Liberty’s stake to 49.9% of the company. The NOl’s can be carried for 20 years. Most believe that Sirius XM will be able to use most of those in a much shorter time-frame.
So given this information, how are Sirius XM’s NOL’s valuable to Liberty? Many have thought that the only way Liberty can monetize their preferred shares is to convert them to common, or take over Sirius XM. What most fail to realize is that Liberty has another avenue at their disposal. Liberty’s preferred shares represent a 40% stake in Sirius XM. Those preferred shares belong to Liberty, and they are free to do what they want with them. In fact, Liberty could use those shares at some point down the road to buy something else altogether. Stock deals are also tax friendly. Investors in Sirius XM will remember that the merger between Sirius and XM was an ALL STOCK deal for the purpose of avoiding tax implications.
Liberty could stand pat on a 49.9% ownership stake, and let Sirius XM generate substantial profits that will be offset by the NOL’s Sirius XM carries. If Sirius XM becomes “very profitable”, as Liberty’s Greg Maffei stated back in January, the stock price of Sirius XM will rise, and by extension, the value of Liberty’s preferred shares will as well. If Liberty’s stake becomes worth more billions, they will have more billions worth of preferred stock to work with in a totally unrelated deal, and as we know, stock deals are tax friendly deals.
In essence, Liberty has an avenue to monetize their investment into Sirius XM that most people have not considered, and that avenue could take years to play out, as Sirius XM finishes absorbing their NOL’s through the course of their business. It is important that investors understand all of the avenues that Liberty has with regard to their stake in Sirius XM. For those hoping Sirius XM will buy back those shares…remember, as the value of Sirius XM grows, so will the value of that preferred stake. In addition, the company needs to be profitable in order to initiate a share buyback program. Paying down their debt, improving the balance sheet, and operating a profitable satellite radio business are the first priorities.
Liberty has indeed sought and gained government approval to carry an ownership interest above 49.9%, but there is no time-frame on that approval, and the government approval does not trump a contractual agreement between Liberty and Sirius XM. The deal between Sirius XM and Liberty carries strict stipulations that no action above 49.9% can happen prior to March 2011 without approval of the independent members of the Board of Directors. After March 2011, Liberty can make a move above 49.9%, but MUST put a tender offer on the table to purchase ALL stock, and by extension would be buying all of the $3 billion in debt as well. Most restrictions on Liberty lift after March 2012, but the valuable NOL’s will continue for years to come.
Let me be clear that nothing regarding Liberty is imminent, nor is the potential that Liberty could deal away their preferred stake happening. The point is Liberty does not have to be in a hurry to do anything, and there are situations where a rise in Sirius XM stock price is beneficial to Liberty. No one but Liberty knows what their intentions are at this point. Tempered speculation is fine as long as everyone understands the time-frames, dates and various options that are available to Liberty.
Position – Long Sirius XM Radio – No Position Liberty Media
Spencer,
Thank you for the well thought out explanation. This was very helpful in understanding Liberty’s stake in SiriusXM and the time frames of their deal.
Jake,
You are most welcome. Thank you for the kind words, and I am glad this article was helpful.
“Tender Offer”
Offer to buy shares of a corporation, usually at a Premium above the shares’ market price, for cash, securities, or both, often with the objective of taking control of the Target Company. A tender offer may arise from friendly negotiations between the company and a corporate suitor or may be unsolicited and possibly unfriendly, resulting in countermeasures being taken by the target firm. The Securities and Exchange Commission requires any corporate suitor accumulating 5% or more of a target company to make disclosures to the SEC, the target company, and the relevant exchange. See also Schedule 13d; Takeover; Treasury Stock.
Tender Offer
Unlike a merger, which is negotiated with Target’s management and board and is an offer to purchase 100% of a company, a tender offer is an offer made directly to Target shareholders to purchase some specified number of Target shares at the offer price (usually an offer for 100% in an acquisition context). In essence, shareholders “vote” by choosing to tender or not tender their shares. If less than 100% of the shares are tendered by shareholders (which is almost always the case) then a second step, a merger, is required in order to gain control of those non-tendered shares. Thus in contrast to the one-step merger described above, a tender offer is a two-step process of (i) the tender offer followed by (ii) a close-out merger (either short-form or long-form). Whether the second step is a “short-form merger” or a “long-form merger” depends on how many shares were tendered while the tender offer was open. Because tender offers are made directly to shareholders, they can be either friendly or hostile (i.e., with or without Target management and board approval).
Whereas a tender offer is an offer to purchase shares from Target shareholders in exchange for cash, an exchange offer is an offer to purchase shares from Target shareholders in exchange for stock or a combination of stock and cash. Thus whether an offer made directly to shareholders to purchase their shares is a “tender” offer or an “exchange” offer depends on the type of consideration being offered. Technically, if Acquiror is offering only cash, it is a “tender” offer, and if Acquiror is offering any stock at all, it is an “exchange” offer. In practice, many people refer to an offer to purchase shares directly from shareholders as a ‘tender offer,’ regardless of whether the acquisition consideration is cash (tender offer) or stock (exchange offer).
Interesting. Do you know what happened with Malone and WorldSpace.
Aren’t operational satellites worth anything?
I mean to just park it in a “junkyard” or burn into deorbit strikes me as a very strange move. Why not sell the discounted asset to Sirius?