|Sirius Fights Power Play by Malone |
Three Years After Sending Lifeline to Satellite-Radio Firm, Liberty Mogul Seeks Control
By MARTIN PEERS
Wall Street Journal
Updated April 1, 2012, 6:18 p.m. ET
As the No. 2 executive at Viacom Inc. VIAB +0.25%nearly a decade ago, Mel Karmazin battled with Chairman Sumner Redstone and lost. Now Mr. Karmazin, who has been chief executive of Sirius XM Radio Inc. SIRI +4.52%since 2004, is going up against another media mogul, John Malone.
On Friday the satellite-radio broadcaster asked the Federal Communications Commission to "dismiss or deny" an application made by Mr. Malone's Liberty Media Corp. LMCA +1.45%for approval to take "de facto" control of the satellite-radio broadcaster. A shareholder is deemed to have de facto control if it has less than 50.01% of a company but a big enough stake effectively to be in charge.
Liberty has preferred stock that is convertible into 40% of Sirius stock, a far bigger stake than anyone else, but it can't easily exercise control. Unless it converts its preferred shares, it can't vote for all directors and is limited to designating less than half the board seats.
If Liberty gets approval, which could be a lengthy process, the company would be able to use its existing stake to take control. Approval also would let Liberty more easily lift its holding in Sirius above 50%, a move that offers Liberty lucrative tax advantages.
The application with the FCC keeps Liberty's options open, a person familiar with the situation said.
Mr. Karmazin appeared to be trying to forestall either move. Sirius argued in its petition that Liberty's application should be rejected because the company hadn't taken action to gain control. A feisty veteran of the radio industry, Mr. Karmazin also has told investors he doesn't want Liberty taking control without paying a premium to the current stock price. Nor is he eager to have a boss.
"I'm not really good at working for somebody," he said at a media conference last year about the possibility of a Liberty takeover, according to Reuters. "I just could not be a No. 2."
"This is a fight…about who is really running the company," said John Tinker, an analyst at Maxim Group LLC.
The duel comes as Sirius's business has turned the corner after a long period of losses. Liberty obtained the preferred stock when it rescued Sirius from financial distress with a $530 million loan at the height of the 2008-'09 financial crisis. Sirius since has started making money—turning a $427 million net profit last year from a loss of $538 million in 2009. The satellite-radio company's subscriber count is up 15% since the end of 2008 to 21.9 million. And Sirius's stock has soared to $2.31 a share from about six cents in early 2009.
Liberty's stake now is valued at nearly $6 billion—a huge increase on the $12,500 it paid for the preferred shares.
Liberty's FCC filing was triggered by the expiration on March 6 of a three-year-old standstill agreement that handcuffed Libert's ability to take action to gain control, including going above 49.9% without bidding for all of Sirius's shares.
Liberty Chief Executive Gregory Maffei in late February told investors that the company had several options for maximizing the value of its stake. They included lifting its stake above 50% or spinning off its interest to shareholders. A benefit of a spinoff is that it could be tax-free.
Liberty said in its filing that it made the application for de facto control because of the significance of the standstill restrictions to the FCC in 2009. At that time, Liberty said in the filing, commission staff asked whether Liberty had acquired de facto control. Liberty pointed to the restrictions in the standstill agreement as evidence that it hadn't. The company said it also committed to the FCC at that time that Liberty would "not exercise de facto control over Sirius" and had "no intention of doing so."
An FCC spokesman declined to comment.
Sirius argued in its FCC filing that the standstill agreement's expiration "does not result in a de facto transfer of control." It noted that while Liberty has a "substantial minority interest" it can only designate five of the board's 13 members. And while Liberty now has the freedom to seek control, "it has not done so," Sirius also argued.
The 2009 agreement said Liberty can't vote its preferred stock for all board nominees but is designated seats in proportion to its preferred stake. But Liberty can convert the preferred stock to common shares if it wants to. The person familiar with the situation said that with 40% of Sirius's common shares, Liberty would have enough voting power to take control of the board.
There is precedent for minority shareholders to have effective control of companies, usually when no one else has a big stake. Liberty said in its application that the FCC approved the company to take de facto control of DirecTV DTV -0.30%in 2008 when it acquired a 40% stake in the satellite-television company.
Sirius argued to the FCC that the DirecTV situation was different because DirecTV didn't dispute that Liberty was taking de facto control.
The Sirius-Liberty dispute has turned nasty. The companies in their filings to the FCC said Sirius had refused to give Liberty certain passwords that it needed to file electronically, as required. Since the application wasn't submitted electronically, Sirius said, it was "procedurally deficient," a reason the application should be rejected.
Sirius explained its unwillingness to provide the passwords by saying that "as a matter of corporate governance, Sirius XM cannot participate in an application" that it believes to be "inaccurate" and "unnecessary."