Last week, in a move anticipated since the announcement in May of a forward purchase contract, Liberty Media Corp. took delivery of an additional 302 million shares of Sirius XM Radio Inc. By accepting those shares, which boosted its equity stake in Sirius to 46.2%, Liberty fanned expectations that it would double down on efforts to control the satellite radio broadcaster.
But the move can also be seen as a precedent, one signaling Liberty's acceptance of an additional 9.5 million shares of Live Nation Entertainment Inc. After all, for its possible boost in Live Nation equity, Liberty entered into another forward purchase contract. And, considering the Live Nation contract expires only days after the Sirius contract, Liberty's stake in the world's largest live entertainment company could soon jump to 26% from 21%.
For followers of Liberty and its dealmaker leaders, John Malone and Greg Maffei, this will be when the fun begins. Maffei himself hinted at some of the eagerly awaited activity when he used the occasion of his company's most recent earnings call to report that, on May 17, the Liberty-owned Atlanta Braves qualified as a "five-year trade or business." That's a necessary qualification, as tax experts and maybe a handful of others know, for a tax-free spinoff of that trade or business. What's more, if properly paired, such a spinoff can also include shares of other companies.
The Deal magazine has already reported on how a combination of shares and a trade or business would technically take the form of a so-called controlled company, meaning a company that's at least 80% owned by a so-called distributing corporation. The report even included an example: a Sirius shares-Braves combo as the controlled company, or ConCo, and Liberty as the distributing corporation. This, in turn, could set up a tax-free acquisition of ConCo -- the Sirius shares and Braves combo -- by the part of Sirius that Liberty doesn't own. It could lead to a reunited Sirius, in other words, without tax consequences but with a Major League Baseball team thrown in for legal measure.
Today's question is why stop there? Why stop with a Sirius shares-Braves pairing? Why not extend the tax breaks afforded by the ConCo exercise to include Liberty's Live Nation stake and, say, 100%-owned TruePosition Inc.? With so many moving parts, the reasoning goes, what's the harm of a few more?
Here's a back-of-the-envelope take on what could be in the offing. Liberty's Sirius contribution to ConCo, including debt ownership, comes in around $6.4 billion. The Live Nation contribution, once converted and marked to market, adds about $440 million. Say the Braves, acquired for $461 million, are now worth $1 billion. And TruePosition, which sells location determination solutions, gets valued at $400 million. Let's also assume Liberty gifts ConCo with $1 billion in cash just before spinoff, thus bringing its total value to $9.24 billion.
Assume, too, that Liberty spins off ConCo on a one-for-one share basis. This suggests ConCo would trade around $72 per share ($9.24 billion divided by the 128.8 million shares Liberty has outstanding). It further suggests that, given Sirius' $7.7 billion market capitalization, a merger of ConCo into the rest of Sirius would be tax-free under reverse Morris Trust rules in that ConCo's shareholders would start off with a majority in the surviving entity.
For understandable reasons, given the resistance of Sirius CEO Mel Karmazin to Liberty's control grab, the satellite broadcaster has been reluctant to reduce the number of its outstanding shares through buybacks. (Doing so would merely increase Liberty's concentration of ownership.) However, were a rapprochement reached, Karmazin's company has about $700 million in projected free cash flow this year that could be put to that use.
ConCo could facilitate such a rapprochement in that, after being spun off and merged into Sirius, it would remove Liberty from the current Liberty-Sirius equation. Which is to say that, after Liberty's financial engineering, Sirius would still need an operating leader of the sort it already has in Karmazin.
The exercise needn't even end there. Karmazin, whose ConCo cooperation could vest Sirius with as much as 26% of Live Nation, would be in pole position to acquire more. And he just might exploit that position to assume control of the live entertainment company -- provided, of course, he gets along with Irving Azoff, its executive chairman, and Michael Rapino, its president and CEO, better than he gets along with Liberty's dealmaking kingpins.
Richard Morgan covers media for The Deal magazine.