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TheStreet Open House

SiriusXM Investors Brace for Liberty Media Battle

Updated from 10:16 a.m. ET with analyst comments, closing share prices and additional information throughout.

NEW YORK (TheStreet) -- Liberty Media (LMCA - Get Report) may be using its proposed acquisition of SiriusXM Holdings (SIRI - Get Report) for a range of purposes such as helping to dramatically cut the company's tax rate or fund a buyout of Time Warner Cable (TWC) through a joint bid with Charter Communication's (CHTR). One thing is clear, SiriusXM shareholders expect a higher payout than the stock transaction offered up by John Malone-chaired Liberty Media on Friday evening.

Yes, Malone's Liberty Media provided life-saving capital to Sirius during the Great Recession of 2009, in a $530 million cash infusion that stands out as one great investments of the financial crisis. Still, those who have invested in SiriusXM amid the company's return to profitability and its rising cash flow on rebounding automotive end-markets aren't likely to simply fork over their shares at Liberty Media's initial bidding price.

Liberty Media said on Friday it would seek to make SiriusXM a wholly owned subsidiary of the media conglomerate in a complicated all-stock transaction that would value the satellite ratio giant at $3.68 apiece in Liberty shares as of Thursday's close.

Already, Liberty Media owns a controlling holding in SiriusXM after gaining 40% of the company's shares in the 2009 capital infusion and making stock subsequent purchases. Currently, Liberty owns nearly 53% of SiriusXM's shares, according to Securities and Exchange Commission filings compiled by Bloomberg.

A surge in SiriusXM shares to $3.84, well above that prospective offering price indicates there could be a negotiation before a transaction occurs. SiriusXM shares traded in excess of $4 a share at certain points of the fourth quarter of 2013 and have been among the most consistent stock market performers, in recent years. SiriusXM shareholders would also receive Liberty's class C shares, meaning they will have no voting power.

Bank of America Merrill Lynch analysts characterized Liberty Media's proposal as "an opportunistic grab for an undervalued asset."

Were a deal to be done on the terms that Liberty Media announced on Friday, current SiriusXM shareholders would own approximately 39% of Liberty Media's outstanding stock. The combined company would have a stock market capitalization of $27 billion, Liberty Media said.

"Our proposal will allow Sirius public shareholders to convert from a non-controlling stake in a subsidiary into a direct equity position in Liberty, the parent company," Greg Maffei, Liberty Media's CEO, said in a Friday statement. However, Maffei and Liberty Media also indicated on a call with investors that there could be some negotiation on any eventual transaction.

With Liberty's stock deal on the table for SiriusXM minority shareholders, the satellite radio giant will need to form a special committee to evaluate the consolidation proposal. Liberty indicated they would be flexible to negotiation once the special committee forms an opinion on their offer.

Friday's deal would seek to convert SiriusXM shares into Liberty Media shares on a tax-free basis. SiriusXM shareholders then would be participating in Liberty Media's future prospects and the earnings and cash flow generating abilities of the combined entity.

For shareholders who had expected SiriusXM to consider large stock buybacks and an eventual dividend, Liberty Media indicated those returns of capital to investors could continue to occur under its ownership.

"The Sirius buyback program becomes the Liberty buyback program," the company said on a call with analysts.

Still there are ulterior motives of Liberty Media, which could mean that acquiring SiriusXM isn't simply about adding the satellite radio giant's earnings streams to its coffers. For instance, an acquisition of SiriusXM and the subsequent boost of Liberty Media's market capitalization to $27 billion could also help the company push a joint bid with Charter Communications in buying Time Warner Cable.

"Currently, SiriusXM has limited investment opportunities so has focused on paying down debt and returning capital to shareholders. Going forward, Liberty management could harness that free cash flow and lever the balance sheet to pursue investments that meet their investment criteria. The largest target would likely be Time Warner Cable," James M. Marsh, a Piper Jaffray analyst said in a Sunday client note. He gives SiriusXM shares an 'overweight' rating and a price target of $5 a share.

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