We postulated last week that in normal times there was nothing wrong with Sirius XM, the freshly merged satellite radio company in the US, but that given that these are not normal times, the company had been deserted by both its shareholders and debt holders, and was in danger of falling to a ‘low ball’ bid to capture it by Dish Networks.
Increasingly it looked like it would headed for the protection of Chapter XI and would then be at the beck and call of its debt holders, and Dish was at the head of the queue. Our argument was that the company had plenty of value once it was over its short and medium term cash needs, and that within two years it would be a cash generating business.
However given the lack of ‘white knights’ playing the field right now, due in turn to the weakness of debt markets and private equity and the uncertainty of corporate values going forwards, Sirius may not have had many ways out of Dish ownership, which might mean new management and integration with the Dish product offerings. Some even said that Dish was just after cheap satellites, although that looked off the mark since it would risk upsetting millions of Sirius customers, many of which may also be Dish customers.
Now Liberty, the vast US content business, which is also the owner of DirecTV, has emerged not so much as a white knight as the Dark Knight, the arch-rival of Dish, determined to head it off at every turn. The logic is that if Dish thinks this is a good idea, then DirecTV’s owner should stop it, especially as it appears to hold the same view as Faultline, which is that long term this is a good investment, and one day it may want to own Sirius itself.
In fact this $530 million deal, whereby $280 million will be paid up front, and then a further $150 million paid later and a further $100 million of debt bought on the open market, will secure 40% of the common stock of Sirius XM, achieved by issuing 12.5 million shares of preferred stock which is convertible into 40% of the common stock of Sirius XM. Liberty will receive seats on the Sirius XM Board. The cash is expensive and will yield 15% interest, but it looks like this will give Sirius enough money to pay off the $171 million of those Dish held 2.5% convertible notes due now and probably get Sirius through to profitability.
The deal keeps the current management in power and is a testimony to the astute leadership of Mel Karmazin, as it is likely that it was him calling Liberty in the first instance rather, than the other way around.
The loan’s are almost sure to be replaced the moment the debt markets recover and this could be a complete steal for Liberty, where it gets most or all of its money back and still gets to own 40% of Sirius. This may simply be sold at a future point in time, yielding a huge return, once both the markets and Sirius are stabilized. That’s what you get when you are the only game in town. Of course Liberty may decide at a later point to exercise further control and look for strategic pairings with Sirius, but for the time being this deal can be done outside of approval of the FCC or anyone else for that matter, since no change of control is taking place. Anti-trust approval has to be sought for the change of the 40% of stock, but that has just a brief waiting period attached to it.
‘We are excited to be investing in Sirius XM. We have been impressed with the company, its operations and management team,” said Greg Maffei, president and CEO of Liberty. ‘Sirius XM’s ability to grow subscribers and revenue in a difficult financial and auto market is indicative of how listeners view this as a “must have” service.”