Liberty Capital Archive

11

Sirius XM, Liberty Media and DISH….Synergies Anyone? Part 1

By
Andrew Montero
– May 2, 2011
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With the recent addition of Dish network(NASDAQ:DISH) executive Carl Vogel to the Sirius XM (NASDAQ:SIRI) Board, many are asking what is the fit. Vogel was one of Dish networks executive officers from 1994 until 1997, and served as President from 1995 until 1997 when he was a key member of the executive team that created and launched DISH Network in 1996. Upon reviewing recent acquisitions by DISH and Charlie Ergen, I came across the following pending acquisition, which I think is a much bigger deal than some have realized.

DISH Network to Purchase DBSD, Developer of U.S. Hybrid Communications System

ENGLEWOOD,
Colo., Feb. 1, 2011 /PRNewswire/ — DISH Network Corporation (Nasdaq: DISH)
announced today that it has entered into an agreement to acquire 100 percent of the equity of the reorganized DBSD North America, Inc., a hybrid satellite and terrestrial communications company, for approximately $1 billion subject to
certain adjustments, including interest accruing on DBSD North America’s existing debt.

DISH Network is also committing to provide a debtor-in-possession credit facility to DBSD North America in connection with filings under Chapter 11 of the U.S. Bankruptcy Code. The credit facility, which remains subject to approval by the Bankruptcy Court, will consist of a non-revolving, multiple draw term loan in the aggregate principal amount of $87.5 million. This transaction is to be completed upon satisfaction of certain conditions, including approval by the Federal Communications Commission and DBSD North America’s emergence from bankruptcy.

Last year ICO Global Communications and DBSD North America deployed Mobile Satellite Services and Satellite-Based Internet Connectivity for Relief Agencies for Haitian Rebuilding Efforts following the disastrous earthquake that occurred there.

Here is a copy of the press release:

RESTON, Va., Mar 08, 2010 (BUSINESS WIRE) — ICO Global Communications (Holdings) Limited (ICO) (NASDAQ:ICOG) and its subsidiary, DBSD North America, Inc., announced that they have deployed satellite-based communications terminals with Internet access for use by relief agencies in Haiti. The terminals, known as CFK-100s, operate in the 2GHz S-band, and can be used in both mobile and fixed environments. They were installed and activated on February 17 and are being provided as part of the relief efforts of the International Telecommunications Union (ITU). Service is being provided through the G1 satellite, which was launched in April 2008.

The equipment and airtime are being provided free of charge under the terms of a 2007 Memorandum of Understanding between ICO, the ITU and the Commonwealth Business Council (CBC), which called for assistance, technology and airtime in response to natural disasters. Laptop computers and peripheral equipment are being provided for the project through a financial grant from the Hong-Kong-based RYTHM Foundation, the Corporate Social Responsibility arm of the QI Group, a member organization of the CBC. In addition, technical services to support the initiative were donated by Space Systems/Loral, manufacturer of the G1 satellite; Intelsat, a leading provider of fixed satellite services worldwide; and Hughes Network Systems, a provider of two-way satellite communications technology for the G1 satellite.

What could this mean to Sirius XM? Well, let’s start with the fact that Sirius XM is increasingly making its internet service more of a value. What does that have to do with DISH you say? DBSD is considered valuable because of its access to broadband spectrum. With increased spectrum some experts believe EchoStar and Dish Network which also has some spectrum of its own already in the mix will put DBSD and Dish together and create huge a 4G or LTE networks to support data and voice communication.

A key area of testing for DBSD post G1 satellite launch in 2009 was for two-way services which support a variety of mobile satellite devices. DBSD worked with Qualcomm (NASDAQ:QCOM), to develop a satellite communication protocol called EGAL (Enhanced Geosatellite AirLink), which could be easily implemented in standard Qualcomm cellular chipsets. The initial test calls made over the G1 satellite utilized a cellular handset that was equipped with EGAL software. Subsequent work during the alpha trials included demonstrations of handsets and wireless devices that can operate in both terrestrial and satellite modes in urban and rural areas showcasing the potential of mobile satellite services to further enhance today’s traditional mobile offerings and providing a path to commercialization of next generation mobile satellite services.

Additionally, In order to demonstrate the capabilities of the G1 satellite and the use of an Ancillary Terrestrial Component (ATC), DBSD developed a demonstration product that integrated the ability to deliver two way interactive services with content broadcast services. DBSD expanded its partners to include NBC Universal, Discovery Networks, MTV Networks and Cartoon Network to demonstrate a live mobile television service that is capable of delivering 10 to 15 channels of live television broadcast content to vehicles and mobile devices. The product tested is referred to as Mobile Interactive Media, or MIM.

As a concept product, MIM combines live mobile television, assisted navigation and two-way communications capabilities into a bundled package which takes advantage of strong la carte demand for these services in the automotive market. MIM was named “Best of the Best” at the 2009 International Consumer Electronics Show. Features of MIM include:

1) 10 – 15 channels of live television content from leading brands, offering a mix of news, entertainment and children’s programming

2) Assisted navigation

3) Communications capability for telematics and emergency messaging applications

In short, Sirius XM is now aligned with Liberty Media (NASDAQ:LINTA) and Dish Network. The combination will prove to be a powerhouse of the New Media market. There are synergies and leveraging capabilities with these three companies that bode extremely well for the future of new media and mobile infotainment. This does not even take into account Dish networks recent purchase of Blockbuster, but imagine the possibilities.

Disclosure: Long SIRI, No current holdings in LCAPA, DISH or Qualcomm

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9

Can Liberty Media Lose Control Of Sirius XM?

By
king1
– March 7, 2011
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By Relmor Demitrius

       Long time Sirius XM (NASDAQ:SIRI) stockholders remember February of 2009 very well.  With massive debt coming due in 2009 and increasingly limited means of removing it, Sirius XM needed a loan.  Liberty Media (NASDAQ:LINTA) provided Sirius XM with a temporary loan it needed to meet is financial obligations for the year 2009.  In exchange for this help, Sirius XM gave Liberty Media preferred shares worth 40% of the total outstanding shares at the time of conversion. These shares had added power associated with them as well.  These included voting rights, say in stock issuances, ability to nix new debt obligations over 10 million (other than refinancing existing debt),  and say in any selling of assets.  These rights have no expiration date so long as Liberty beneficially owns at least half its initial investment and are good until conversion.  So what can Sirius XM do to regain more control with the current board of directors (who represent SIRI stockholders, not Liberty Capital (NASDAQ:SIRI)), which is the tracking stock being used to hold Liberty’s 40% stake in Sirius XM.  Is there an opening for another bidder?  Is there a war of control coming?  Do Sirius XM and Liberty’s intentions match?  For control, maybe not.  How would history view Mel Karmazin if he somehow managed to regain control of the company  from Liberty or was able to somehow introduce another party to drive the price up?  Does he have the tools necessary? 

Liberty is a big supporter of current management and seem content to keep only 2 board seats at this time.  They are allowed 6 of 15 seats maximum currently.  John Malone and Greg Maffei, and Flowers (3 Liberty Media members on the Sirius XM board) are not stupid.  They knew keeping current management maximized the company’s chances for success.  Also why ruin your underlying value of your holding by making bad business decisions or trying to fix something that isn’t broken?  Liberty counts the value of their holding as current conversion share quantity (if they converted today) times the current share price.  Right now Liberty is stating this value is around 4.7 billion dollars. 

But who does the Sirius XM board really represent?  No insider holds significant percentage amounts in the stock.  Option contracts awarded for no cost to the insider is not the same type of motivation one gets from an actual direct stock purchase (something no insider has done one since Mel Karmazin (CEO of Sirius XM) purchased 3 million shares in 2008 at $1.37 a share.  Any board member buy any shares?  No.  Officers of the company?  No.  Related parties?  No.  Did John Malone buy any shares?  No.  Greg Maffei?  No.  How many institutions are big block holders who own more than 4.5% of the company?  Zero.  So who is the board exactly representing?  Leon Black, long time board member since his Apollo Group loaned Sirius Satellite Radio money a few years back, did own 90 million shares through Apollo, but now they reportedly have sold over 60 million of those shares according to the latest filing.  So who on the board actually has a vested interest in protecting the stockholders?  By law, the board must act in the best interest of its stockholders.  Giving out bonus shares in December of 2008 on the verge of bankruptcy is one small example of the board possibly failing in this obligation.  Will there be others?  Maybe Mel Karamzin cares as a matter of personal pride.  He does own significant amounts of option contracts that I’m sure he’d rather exercise at a higher price than a lower one, but those were issued for free at a break even price of around .46 cents.  So Mel is already very rich from this deal.  Does anyone on the board actually care to get creative and even try to dilute Liberty’s control, or actually try to make it harder to acquire?  Mel Karmazin is the wild card here.  He has stated that he will make it as hard on Liberty as possible to gain further control.  He took the best deal on the table in February of 2009 that allowed him to stay in control.  I believe Mel Karamzin does want the SIRI common to succeed, and I don’t feel being owned by Liberty is benefiting the company in any way other than possible tax advice (Malone is considered a tax expert) in 2 years now.  The only thing Liberty owning 40% control has done has limited other potential buyers.  In fact Sirius XM lists Liberty’s ownership in their SEC annual report as a stock negative, citing how it could inhibit potential buyers and that Liberty’s interests might not be the same as Sirius XM’s.  There have been no monetary benefits or cash infusion of any kind by synergies or deals with anything else owned by Liberty Media.  LCAPA has offered no cash to supplement Sirius XM’s balance sheet. 

Mel gets some firepower back in a few months.  The poison pill does expire in August of this year and should allow the opportunity for a possible buyer, or large block accumulator or two to add significant amounts of control.  The expiration of the poison pill, I’m sure something Mel fought for to expire in negotiations with Liberty, might be the first weapon Mel obtains in this fight.  Basically now outside buyers are free to add shares with no dilutive effects.  What else is possible?

Here is one idea I have heard.  Sirius XM can reverse split the stock, increasing the authorized share amount percentage wise much higher than the current ratio of outstanding to authorize shares, hence allowing a post conversion dilution of Liberty’s shares.  This would be the only way to add to the authorized share count without Liberty’s consent.  If a reverse split is on the table when Liberty converts, Mel can sell to a trusted party, or parties, board members, or institutions friendly to his control, and dilute Liberty’s stake to well under 30% or less if a high enough reverse split is enacted.  Only one problem with this.  Liberty can vote down any reverse split votes and will (Liberty does not want a reverse split option on the board) as it prevents a conversion.  Mel could reverse split right now until June 28th without Liberty’s approval, but would have no benefit in doing so until Liberty actually converted.  Mel’s time table for the reverse split option is running out.  As this year’s proxy statement is due in about a month, we will know soon if the r/s vote is being extended or not.  If so, and Liberty votes it down, we would have our first visible conflict between the parties.  Liberty had to agree to extend the reverse split option in June of 2010 because of delisting concerns, and as protection to the value of their holding.  If delisting is off the table, so is Liberty’s support for a r/s.  Liberty wants the stock to appreciate naturally, with full share count in tact.   With a zero dollar buy in price, why not right?  There is one more way I can think of the board can reduce the amount of control Liberty has to a buy out offer.  You can weaken their leveraged ability and value of their Sirius XM holding.  How?  By buying back shares on the open market.

How is the possible you say?  Liberty cannot prevent Sirius XM from using its cash on hand to buy back shares.  Liberty can also not prevent Sirius XM from refinancing debt either, which could also free up cash to buy back shares.  What Sirius XM cannot do without Liberty’s approval is take on debt to buy back shares.  But will they buy back shares?  Sound crazy?  Not really.  Mel has been threatening to do this since at least the last 3 conference calls.  There are no current debt covenants preventing this.  He has also stated in the latest conference call a desire to stay debt to ebitda leveraged at 3 to 1, or a 3 rating.  They are currently a tad over 4.  So if you remove the 200 million due in 2011, and assume the 2014 bonds are converting to shares in the 2013 to 2014 time frame, you’re really left with in or around 2014 an almost 2.2 debt ratio using 1 billion EBITDA.  That will probably be too low in 2014.  That is very conservative estimate of EBITDA.  This would open the door for Mel to take on bonds and new money for the sole purpose of reducing the outstanding share count.  Since Mel may not be allowed by Liberty to go into debt to buy back shares, nothing prevents Sirius XM from refinancing debt due sooner and using cash on hand instead of buying back the bonds, to buy back shares. 

How does this weaken Liberty?  It doesn’t necessarily, but it can in theory only.  Where the stock price goes after the buy back would be crucial.  Since for every 1 share in the outstanding count Sirius XM has, .4 shares needs to be set aside for Liberty Media in case of a conversion.  So by buying back 1 share from the float, you would reduce the outstanding share count by 1.4 shares.  With a static stock price, this reduces the total value of LCAPA’s holding.  This greatly improves your p/e ratio and earnings per share as well.  It’s a win win for stockholders.  No value in it at all for Liberty Media.  Best case scenario is it evens out.  The stock would need to appreciate proportionally because you have changed the equation.  You reduce Liberty’s shares being held for conversion, making it a little easier possibly for a third party buyer to bully Liberty out of the picture with a high tender offer.  Since Liberty may not have as much leverage from the total value of their holding anymore, this could weaken their position to over pay for remaining control of the company.  Of course if the stock price takes off even more than the reduced number of theoretical converted shares at any point in time, because of maybe simply announcing a buy back, it would still be a win win for Sirius XM stockholders, as they gained value versus previous levels and have the same amount of shares in hand.  The other way, it not being reflected 100% in the appreciation of the stock, helps allow a new buyer to enter.  As of right now, approximately 2.6 billion shares are set aside and untouched in case Liberty converts.  Sirius XM has a total of 3.361 billion shares set aside for all reasons.  If you add this to the float, you come up with around 6.5 billion shares outstanding.  2.56 billion shares Liberty would have if they converted today.   This of course including stocks for option plans, warrants, and of course the 3.9 billion shares in the float.

So as you can see, between now and March of 2012 should be very interesting and revealing in what is going to happen.  I expect Liberty to add board seats this year or next.  There could very well be situations and possibilities other than discussed here, and would be more than happy to have them shared. 

To continue this conversation and offer your own thoughts to like minded investors, please visit www.kingofalltrades.com/community.

Disclosure:  Long SIRI

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6

Sirius XM’s David Frear’s Candid Talk Fuels Speculation (NASDAQ:SIRI)

By
king1
– November 22, 2010
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By Relmor Demitrius –

On Thursday of last week, David Frear, CFO and Vice President of Sirius XM Radio (NASDAQ:SIRI) presented at the Bank of America Merrill Lynch Credit Conference.  What was expected as another boring non committal presentation about long already known facts, turned into a candid offering from a usually very close vested company.  Frear added some insight into their future, discussed metrics never before mentioned, and even offered some comments on current speculations.  He covered many topics during his brief 40 minute discussion and slide show.

Frear discussed the automotive industry in regards to their relationships, future plans, and current situation in general.  Sirius XM currently has around a 60% penetration rate in the OEM market.  They will now be oscillating between around 60% and 65% going forward.  This is actually the desired amount of penetration Sirius XM has been seeking.  With their current “smarter penetration” strategies some models will have only an option to install or not be available at all.  These had been traditionally low take rate promotional subscribers and Sirius XM has run numbers that suggest leaving the option from a few models is ideal.  That is an exciting achievement for this company.  They can actually say they have

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17

Sirius XM Radio (NASDAQ: SIRI) Validating Itself and Moving Up

By
Andrew Montero
– October 27, 2010
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globexmsiriusbig

There’s a reason why the stock of Sirius XM radio is moving up. The recent refinancing of some of its debt has left the company in a much more favorable position going forward with significantly reduced interest on their debt,that, along with the fact that more money stands to hit the bottom line as CAPEX will be reduced for the next several years, has left the company primed for success. There will be substantial differences, tangible ones on future quarterly balance sheets after 2010. With Sirius XM beginning to  show it will be routinely profitable, those $ 8 billion dollars in NOLs will really have some positive effect on the bottom line going forward.

So…. the market believes that Sirius XM is more valuable at the moment than Netflix( NASDAQ:NFLX).  Not a surprise since there are only 3.9 billion shares being traded and available right now and not really the 6.4 billion shares outstanding constantly quoted.  Liberty Media owns preferred shares with the potential to convert into another 2.5 billion or so common. Those shares are attributed to Liberty Capital (NASDAQ:LCAPA,LCAPB) And while that value percentage of the company has to be accounted for, it also makes  the available shares not so available.  Sirius still has another $3 billion in debt, but it is much more manageable debt.  Sirius XM commands an enterprise value of roughly $11.7 billion. But let’s take a closer look at that.  Enterprise value is calculated by adding a corporation’s market capitalization, preferred stock, and outstanding debt together and then subtracting out the cash and cash equivalents found on the balance sheet. The reason the cash is subtracted is that once you have acquired complete ownership of the company, the cash becomes yours. I will come back to this part of the article a little later.

Sirius XM has kept monthly churn down and has reported churn of 1.8% latest quarter. Not a surprise really since Sirius XM subscribers receive significant discounts for pre  paying their subscriptions. Lets talk growth. Sirius XM’s subscriber base has grown from 1.6 million subscribers in 2003 to 20 million strong in 2010 just 7 years later, with no signs of stopping as the Auto industry recovers. We know and understand that OEM radios are the driver so far for subscribers, but the company has been smart if not aggressive in leveraging their content over the internet and portable devices as well.

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31

How Much of Sirius XM’s Success is Howard Stern?

By
king1
– September 2, 2010
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By Relmor Demitrius

Mel and Howard

Mel and Howard

There are many ways to identify and define success.  The same can be said about worth and value.  It is especially true when trying to apply these concepts to something intangible, as an artist or performer.  Take a talent like Howard Stern.  He’s not a hard asset that you can simply attach a known value to, or state exactly what he would mean to your company.  What is his actual value to Sirius XM Radio (NASDAQ:SIRI)?  When Greg Maffei (CEO of Liberty Media and Liberty Capital (NASDAQ:LCAPA) and 40% owners of Sirius XM, ask Mel Karmazin (CEO of Sirius XM) how much is Howard Stern worth to the company, what does he tell him?  This is the debate among bloggers to professional financial analysis that has been going on for years.  How do you evaluate Howard Stern’s actual value to the company?  He makes 100 million dollars a year, minus the cost to run his show.  Is he worth it?  Is he overpaid?  Is he underpaid?  Is he fairly paid?  How much of Sirius XM’s revenue can be attributed to him.  In this article I will go over the effect of signing Howard Stern to Sirius Satellite Radio and any effect overall he had on the satellite radio industry altogether.  First, let’s get some opinions out of the way.

Howard Stern is an amazing talent and still the best radio on radio.  No offense to Michael Savage fans, Rush Limbaugh, Opie and Anthony, or Larry King.  Whatever.  There is still no bigger celebrity in radio.  Rush is close, but I don’t think he even can match Howard still to this day.  Howard’s popularity may be waning but he is still the best.  That being said, let us leave the personal opinions and feelings at the door.

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