John C. 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 would get a derisory 3 percent premium and perhaps better liquidity in return for non-voting Liberty stock with inferior prospects. Sirius shareholders should hit back.
Mr. 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 raised 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 Mr. 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 earnings before interest, taxes, depreciation and amortization, or Ebitda, this year.
Sirius also has a big chunk of operating losses which appeal to the notoriously tax-averse Mr. 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 Liberty Interactive in exchange for ceding control of the company to Mr. 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 Mr. 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 Mr. Malone has a big stake in a firm, other investors need to watch their step.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
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