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Tuesday, 21 October 2014

Dog of an offer

John Malone deploys same old tricks against Sirius

John Malone is up to his same old tricks against Sirius XM. Liberty Media, where he serves as chairman, is offering more than $10 billion to squeeze out the satellite radio company’s minority investors. They’d get a derisory 3 pct premium and perhaps better liquidity in return for non-voting Liberty stock with inferior prospects. Sirius shareholders should hit back.

Malone’s investment in Sirius has had a phenomenal return. In 2009, Liberty Media lent the nearly bankrupt firm $530 million at onerous terms and bought preferred shares convertible into a 40 percent stake in Sirius for a pittance. Liberty then converted and upped its stake by purchasing more shares, taking control early last year.

Liberty’s stake in Sirius is now worth about $12 billion, or almost three-quarters of the total market capitalization of Malone’s company. Collapsing this structure would give Liberty full access to Sirius’ fulsome cash generation – analysts figure the radio company should generate just under $1.5 billion of EBITDA this year.

Sirius also has a big chunk of operating losses which appeal to the notoriously tax-averse Malone. Combined, these two attributes would help the company swing more cable deals – including, perhaps, Liberty increasing its more than 25 percent stake in Charter Communications.

Liberty argues there’s no need for a bigger premium, since it already exerts control. But minority investors who put up a fight in such situations can often wrangle a better deal. Those who don’t tend to be treated poorly – consider how common shareholders got zilch in 2012 when Barry Diller sold his shares in TripAdvisor at a 63 percent premium to Malone’s Liberty Interactive in exchange for ceding control of the company to Malone.

Sirius investors certainly have a case: they’re being offered very little for conceding to being a smaller part of a larger firm and stripped of their voting rights. And the satellite radio company’s stock price is already above Liberty’s bid, suggesting Malone may have to do more to win them over.

This is, though, probably just one move in a larger game. Charter’s investors, for one, should learn a lesson – once Malone has a big stake in a firm, other investors need to watch their step.

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Liberty Media announced on Jan. 3 that it had offered to acquire the almost 50 percent of Sirius XM it does not own in an all-stock transaction valued at more than $10 billion. Under the offer, each share of Sirius would be converted into non-voting C class shares in Liberty Media. The exchange offer of 0.076 would value each Sirius share at $3.68 based on the Jan. 3 closing price. That is equal to a 3 percent premium. Sirius shareholders would own approximately 39 percent of Liberty under the proposal.

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