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Sirius XM: Liberty Withdraws FCC Application And Refiles For Total Control

August 18, 2012

Sirius XM (SIRI) has filed an 8-k with the SEC that says Liberty Media (LMCA) plans to increase its ownership of Sirius to more than 50%. The company has now, in a separate document, withdrawn its application for de facto control of Sirius and simultaneously filed a new application with the FCC that it wants De Jure Control of Sirius, and plans to complete the takeover within 60 days of consent from the Commission. The document also states that Sirius will give its full cooperation, and it is signed by Sirius CFO David Frear:

On August 17, 2012, Liberty Media Corporation filed with the Federal Communications Commission ("Commission") an Application for Consent to Transfer of De Jure Control (the "Application"). In the Application, Liberty Media indicates, among other things, that it "intends to purchase sufficient additional shares of Sirius common stock such that, upon conversion of its Preferred Shares, it will own more than 50% of the total outstanding shares of Sirius…." Liberty Media also noted that it will "have purchased sufficient shares of Sirius' common stock and will convert its Preferred Shares such that the transfer of control will be completed within 60 days of Commission consent."The Company will cooperate fully with the Commission in its evaluation of the Application.

So a lot of the speculation is over. We can now assume that Liberty's actions this week were due to the fact that the FCC would have required the company to buy enough Sirius shares to go into hard control. This is a great relief to me, because otherwise the FCC would have set a precedent that 46.2% was the new 50%. This explains why Liberty went on the sudden buying spree and upped its stake to 48%. But, because Liberty will still need the additional 3% or more of Sirius shares, this should solidify the current stock price, which has been hovering between $2.55 and $2.60 today. And this may now be the new base price; as the shares can finally take off. This is also huge, because it appears that this time Sirius has given its blessing to the application.

We can now expect a share buyback, which will give Liberty even more of a chunk. If the FCC approves the current application before the company converts its Preferred shares, it could structure a buyback, which the Preferred shares do not participate in, giving Liberty shareholders a larger piece of the pie. As to whether that will happen now, is in the hands of the FCC. They could force Liberty to convert the Preferred shares, but I doubt that they will. In the application, Liberty states that the shares would be converted within 60 days of FCC approval. That is plenty of time to do a buyback, which the company is probably already planning right now.

A Sirius buyback, as I have written about several times will lessen the float and make all of the shares worth more. The price could easily go over $3.50 if all of the Sirius cash is used for the buyback. With less shares, all of the financials look even better than they already do. The P/E goes even lower, and the EPS goes even higher. So, if this is what indeed happens, it will be a win-win for everyone that kept their stock. But, again this must have the blessing of the FCC first.

In lesser news, CEO Mel Karmazin filed a separate SEC document reporting that he did sell 15.9 million of his "charity shares" on August 15 and 16. This was anticipated, as the sales pattern seems to land around the 15th of the month each time. And Liberty also filed another SEC document showing that the company bought another 4.35 million shares of Sirius on the same days that Karmazin sold. Since Liberty will need a lot more shares to bring its ownership to over 50%, we can look forward to more filings like this.

Whether you were for or against Liberty taking control of Sirius, it is in the best interest of both companies to have this situation resolved. I think we can now safely say it's almost over, because if the FCC approves the new application, Liberty takes control. And if the FCC denies it (which I do not anticipate now), Sirius will continue on its own as usual.

Where will Sirius go from here? According to an interview with The Wall Street Journal at the annual Allen & Co. conference in Sun Valley last month:

Liberty Media Chairman John Malone said he is more concerned about evolving technologies than Mr. Karmazin, who has been Sirius's chief executive since 2004, appeared to be.

"I'm a very long-term investor, despite my age," said Mr. Malone, who is 71.

"So I tend to be looking out 10 or 20 years, whereas I think Mel in all honesty right now has got a pretty short-term focus. I think they do an excellent job of running the company but we would be making more investments and...would at least look at globalizing."

There has been a lot of speculation as to whether Karmazin would stay with Sirius if Liberty did take De Jure control. However, he put some of that speculation to rest when he talked about the idea on the last Q2 earnings call. In spite of the rumors that he would want to leave, he said that he will stay, provided that he and the Sirius Board come to an agreement:

I think that I'm the biggest believer in free speech and I don't question anyone's ability to do the right things. But the fact that I was asked a question two years ago about working for somebody and I told them that my experience at Viacom was such that I didn't enjoy and I like working for a Board as compared to working for a controlling shareholder was something that I said. And then every time the discussion of Liberty comes up somebody is coupling my name into that.

I can assure you that our Board and I are interested in trying to accomplish whatever Liberty wants to do as long as it's in all of our shareholders' best interests and that there is no issue involving Mel that has anything to do with the current conversations with Liberty at all. Regarding my contract, it doesn't expire until the end of the year, and prior to the Q3 earnings call, prior to our next call I think the Board and I will deal with it.

This was a relief to a lot of Sirius investors, who believe that Karmazin has been one of the main reasons that Sirius is where it is today. He has led the company through some of the darkest times in our economy since the Great Depression. And Sirius has outperformed any of the other Liberty companies during that time.

That may have been one of the things on Malone's mind when he made another remark at the Sun Valley conference about the issue of Karmazin leaving the company:

Liberty had no intention of taking operating control of Sirius away from Karmazin. "I love Mel," he said. "We hope he is happy."

The prospect of a Sirius share buyback, combined with the exceptional Q2 earnings and future guidance will send the shares soaring short term. And there is no reason to think that the company will not continue to grow like it has over the last couple of years. The icing on the cake will be if Mel stays, and Malone implements some of his investment ideas for the future of Sirius. As to what type of spin-off is planned, that is hard to know for sure. We could speculate for hours on something that Malone may not even know the answer to yet. But at least short term, the shares could be headed for three to four dollars with a buyback.

Disclosure: I am long SIRI.