Sirius XM could yet reclaim the soul it sold

April 30, 2012

By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Sirius XM sold its soul and could pay a hefty price to retrieve it. When the U.S. satellite radio service stared down bankruptcy in 2009, it beat a rescue path to John Malone’s door at Liberty Media. For a financial lifeline, Sirius pledged a 40 percent stake and power over most big decisions to the wily cable magnate. But now he has come to collect.

Malone’s method looks unseemly. After a three-year standstill provision expired last month, he asked the Federal Communications Commission for its blessing to be custodian of Sirius with only a minority stake. That would help lay the groundwork for Liberty to take control without paying a premium to the rest of its shareholders.

Sirius is, broadly speaking, in a weak negotiating position. With its shares trading at about 10 cents apiece three years ago, the company agreed to borrow money from Liberty at 15 percent. It also sold Malone preferred shares for a pittance that convert into 40 percent of Sirius and confer final say-so over any significant deal, stock issuance and other major moves.

Things still turned out well. Revenue at Sirius has increased by about 20 percent to $3 billion, the company is now in the black and the stock trades around $2.25. Malone’s stake, once converted, would be worth some $6 billion.

He almost certainly wants more, however. Nearly $8 billion of net operating losses at Sirius would be useful to Liberty but may not be transferable and are probably too costly to access anyway. But Liberty can block any strategic initiatives Sirius boss Mel Karmazin and his board may want to make, so Malone could press them into another of his fiendishly complex deals.

It would start with Liberty increasing its stake in Sirius to over half, spinning off a new entity created with the Sirius stake and another Liberty-owned operation and then ending with Sirius buying that company with newly issued shares. The advantage of this so-called reverse Morris Trust transaction is that it would be tax-free for Liberty, giving it the most bang for its highly profitable Sirius investment.

Malone can easily acquire an additional 10 percent of Sirius in the market to help achieve the result. Or in exchange for granting Sirius its freedom, he could push it to buy back enough of its own shares to get Liberty to a majority. That would cost Sirius some $2.7 billion, a figure that wouldn’t break the balance sheet but might stretch it to the limits. Some combination of share-buying by the two companies, however, might secure Sirius safe passage from this latest crossroads.

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