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Liberty Prepares for Sirius Profit

10/17/2011 12:01 AM Eastern

With the successful spin of its Liberty
Capital and Liberty Starz tracking stocks behind it, the
next item on Liberty Media’s deal agenda could be monetizing
its 40% stake in satellite radio giant Sirius XM Radio.

The spin of Liberty Capital and Liberty Starz on Sept. 24
effectively transformed a third tracking stock — Liberty Interactive
— into an asset-backed security. While that transaction
had no lasting effect on the Liberty Capital or Liberty Starz
trackers, Morgan Stanley media analyst Ben Swinburne said in
a report last week that monetizing the Sirius equity stake could
Liberty Media’s next big move, according to analysts.

Liberty Capital is an amalgamation of disparate assets, including
Major League Baseball’s Atlanta Braves franchise, a
pair of TV stations in Wisconsin and Michigan, minority equity
interests in Time Warner Inc., Time Warner Cable and
AOL, and several smaller interests in electronic commerce,
concert ticketing and television production companies. By
far, its largest asset is Liberty Media’s 40% equity stake in Sirius
XM, which has increased in value by nearly 8 times over
the past two years.

SIRIUS BUY PAID OFF

Liberty originally invested about $553 million in Sirius in 2009,
allowing the then-troubled satellite radio
company to pay off its looming bond debt and
fend off a hostile takeover bid by major bondholder
Dish Network. In that relatively short
period of time the company managed to right
itself, landing major deals with car manufacturers
— RBC Capital Markets media analyst
David Bank estimated that Sirius’ factory-installed
base will double from 38 million cars
at the end of 2011 to 76 million by 2016. In the
meantime, the value of Liberty’s investment
has swelled to about $4.3 billion.

Just what Liberty would do with its Sirius
stake has been a
burning question for
analysts since it first
made the investment.
Back in August, Pivotal
Research principal
and media and communications
analyst
Jeff Wlodarczak noted that there was
a “reasonable likelihood” that Liberty
Capital would be merged into Sirius
in the first half of next year, similar to
what Liberty did with DirecTV in 2009.

In a research note last week, Swinburne
joined the chorus, adding that
a likely scenario would be for Liberty
to monetize that stake through a Reverse
Morris Trust, which would allow
it spin off the interest into a separate
company, along with a hard asset —
like its 100% interest in location technology
company True Position — and
then combine that spinoff with Sirius.
The result would be a tax-free distribution of the Sirius stake to
shareholders and a simplified structure for Sirius.

STILL SIMPLIFYING

Liberty has gone the Reverse Morris Trust route before —
that is the method it used to monetize its 54% stake in DirecTV
in 2009, so
it is no stranger to
this type of transaction.
And Liberty
has been on a path
toward simplifying
its famously
complex structure
— that was part of
the impetus behind
the trackingstock
transactions
— and monetizing
the Sirius stake
would definitely fit
that bill.

The timing of
such a transaction
is unclear, though.
That’s because in
order to make a Reverse
Morris Trust transaction tax-free, Liberty cannot spin
the stake until it has owned it for a year. That anniversary
will come in March 2012. Liberty would also have to increase
its interest in Sirius to at least 50%, which it cannot
do until after March 2012 due to a standstill agreement it
signed during the initial investment. Swinburne believes
those hurdles are easily cleared, adding that Liberty Capital
could increase its stake through a combination of buying
more stock on its own and through the equity shrink
from Sirius’ own stock repurchase program, or include
more assets or cash in the spin.

Swinburne believes a Sirius transaction could result
in as much as 30% upside to Liberty Capital stock, from
its Oct. 11 price of $70.95 per share to more than $90 per
share.

September