Liberty Media Corp. (LMCA:US), the investment company controlled by John Malone, may be targeting a deal for Time Warner Cable Inc. (TWC:US) with its offer to acquire the remaining shares of satellite-radio carrier Sirius XM Holdings Inc.
Liberty is creating a new class of stock, called Series C, and offering 0.076 of a share for each Sirius share, Malone’s company said in a statement yesterday. The offer will value Sirius at $3.68 a share, which is 3.1 percent above yesterday’s closing price, giving it a market value of about $23 billion.
The deal may help fund an offer for Time Warner Cable through Charter Communications Inc. (CHTR:US), because it will give Liberty more cash flow and additional assets to borrow against, Liberty Chief Executive Officer Greg Maffei said in an interview. Liberty, which owns 27 percent of Charter, has said it wants to keep its stake at about that level.
“Sirius XM will generate more cash for Liberty,” Maffei said yesterday in a telephone interview. “It’s still below its target leverage rate, which we might increase. That could be put toward financing a Time Warner Cable deal.”
Sirius rose 3.6 percent to $3.70 after the close of trading in New York, an indication investors expect Malone’s company to increase its offer before a deal is completed. Time Warner Cable rose (TWC:US) as much as 4 percent to $138.73 after Maffei’s comments. Charter rose less than 1 percent to $134.
Sirius’s net debt (SIRI:US) to trailing 12-month earnings before interest, taxes, depreciation and amortization was 2.36 as of Sept. 30, according to data compiled by Bloomberg. The company’s leverage target is 3.5 times Ebitda, which Liberty could boost to 4 times Ebitda, Maffei said.
Charter, backed by Malone, is preparing a takeover offer of about $135 a share for Time Warner Cable, people familiar with the situation have said.
To avoid getting diluted in any deal with Time Warner Cable, “that would require incremental capital,” Maffei said. The Sirius deal “would provide incremental capital for Liberty.” Sirius has generated about $895 million in free cash flow over the past 12 months, data compiled by Bloomberg show.
While any agreement between Charter and Time Warner Cable would close “significantly later” than this transaction, Maffei said, it wouldn’t be necessary for the Sirius deal to be completed beforehand.
Sirius’s board will form a special committee of independent directors to consider Liberty’s proposal, according to yesterday’s statement. Any deal would be subject to approval by the special committee as well as a majority of Sirius’s shareholders.
“There’s no requirement for the special committee to act before anything is done involving Time Warner Cable,” Maffei said. Liberty decided not to sell its stake (SIRI:US) in Sirius because “we like the business,” he said. “We don’t want to get rid of it. We want to keep our shares in a position of control.”
Sirius has gained 92 percent over the past two years. It has added subscribers as the used and new car markets have recovered, triggering new satellite-radio installations. Sirius had 25.6 million subscribers (SIRI:US) at the end of September.
If the Sirius special committee accepts the offer, Liberty also may buy back more shares, Maffei said. While Malone previously said he intended to spin off Sirius, “Liberty changes its mind all the time,” Maffei said.
After the transaction, Sirius shareholders would own about 39 percent of Liberty, which would count Sirius as a unit, Malone’s company said. Liberty shareholders will get two Series C shares for each Series A and B share they already have.
“It will enable us to focus our energies on the pursuit of new opportunities across the expanded portfolio,” Malone said in the statement. Liberty owns the Atlanta Braves and a stake in Live Nation Entertainment Inc. in addition to its Charter investment.
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