February 18, 2009, 1:30 pm Parsing Sirius XM’s Form 8-K (Sirius’s Last Chance)
By Steven M. Davidoff NY Times http://dealbook.blogs.nytimes.com/2009/02/18/parsing-sirius-xms-form-8-k-siriuss-last-chance/?pagemode=print Distressed deals are sausage. The panic-driven negotiations of the distressed company and the leverage of its savior often work to create both extreme and unusual provisions. So, it is with this hope that I perused the press release of Sirius XM Radio announcing that Liberty Media would provide up to $530 million in loans to Sirius XM and receive a 40 percent stake in Sirius. The press release was disappointing and quite short on details about the transaction. Sirius, however, also filed a Form 8-K with the Securities and Exchange Commission on Wednesday disclosing the announcement of the transaction. This is typical. Also typical was Sirius’s fuller description of the transaction in the Form 8-K itself. It was here that my search yielded some fruit. First, the deal is divided into two separate transactions. The first is a credit agreement for a $250 million term loan and $30 million of purchase money loans between Sirius and Liberty Media. The $250 million loan was funded Wednesday. Both loans bear an interest rate of 15 percent a year and mature on Dec. 20, 2012. The interest rate is reflective of the distress of Sirius and the risk that Liberty is taking. In fact, Sirius used these funds to repay its $175 million in convertible notes that also came due on Wednesday. The more interesting transaction is the second one. This is a credit agreement between Sirius’s subsidiary, the old XM Satellite Radio, and Liberty Media. The XM Credit Agreement provides for a $150 million term loan with an interest at a rate of 15 percent per annum, maturing on May 1, 2011. Unlike the first loan, this second loan does not close immediately. Instead, the funding is subject to several conditions. These include the renegotiation of XM’s other credit agreements to extend their terms and Liberty Media’s going out and purchasing in the market another $100 million of this debt. The second loan is also conditioned on Sirius’s auditors’ not issuing any “going concern” opinion on the company with respect to its 2008 audited financials. A “going concern” caveat in an auditor opinion is code that a company is likely to go bankrupt without additional financing. In connection with this second loan, Liberty is receiving a 40 percent interest in Sirius. Here, I was surprised that no mention of a shareholder vote was in the press release or the Form 8-K. Nasdaq MarketPlace Rule 4350(i) requires a shareholder vote when a Nasdaq-listed company issues common stock or securities convertible into common stock with a 20 percent or greater voting power. But there is an exception that was used in the Bear Stearns and Wachovia deals under a similar New York Stock Exchange rule. A company can forgo this shareholder vote if “the delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise.” I assume Sirius is relying on this exception, but if the company is going this route it is not highlighting it. In addition, there is no explanation for why 40 percent, but I assume that it had to be below a controlling stake in order to avoid violating covenants on Sirius’s other debt. The mechanics of the issuance of the 40 percent stake in Sirius is where it gets interesting. Liberty Media is receiving 12.5 million shares of convertible preferred stock in Sirius in connection with the loans. Upon antitrust clearance, the stock becomes convertible into common stock of Sirius. However, the preferred stock is only issuable upon the satisfaction of the conditions to funding the XM loan, the second loan. The result is that Sirius has a period of time during which it can find an alternative transaction. Here the form 8-K states that: If, prior to April 15, 2009, we receive an alternative proposal that our Board of Directors concludes in good faith is a Superior Proposal … our Board of Directors may terminate the Investment Agreement in order to transact the Superior Proposal. After April 15, 2009, we may terminate the Investment Agreement if our Board of Directors determines it is in our best interests to do so… “Superior Proposal” is defined in the Form 8-K as: a bona fide written alternative proposal that our Board of Directors in good faith determines, after consultation with its legal and financial advisors, would, if accepted, be reasonably capable of being consummated, taking into account legal, financial, regulatory, timing and similar aspects of the proposal and the person making the proposal, and would, if consummated, result in a transaction more favorable to our stockholders from a financial point of view than the transaction contemplated by the Investment Agreement. So, the parties have created a rather intricate structure that unwinds if a superior proposal is made and accepted before the stock issuance under the investment agreement. If such a proposal is made and accepted, the stock issuance and the second-phase loan do not occur. Liberty is also entitled to a $7 million termination fee. In addition, if a superior bid is successful, Liberty can demand that the first loan be repaid with a $14 million premium. The end result is that while the bidding for Sirius looks over, it might not be. Sirius has negotiated an out if a superior bid is made before the second loan closes. By putting this announcement in its Form 8-K, Sirius is acting to alert the world. The agreements for this transaction have not yet been filed with the S.E.C. In fact, they are probably still being negotiated before the deadline for filing, which is next Monday. We will know then how large the opening Sirius has preserved for itself. I suspect there will be more surprises and tricks as the lawyers struggle for every advantage. Ultimately, though, the Sirius precedent shows that even in a distressed situation, a target can negotiate some possible out. The question I have is whether Sirius was able to do this because of bargaining leverage or an argument under Delaware law that this was necessary. The standard the Delaware Chancery Court would likely apply here would be Unocal. This requires that a board not act in a preclusive or coercive nature and that its response be reasonable in relation to the threat posed. Here, the threat would either be corporate bankruptcy or an intervening bid. Given Sirius’s distressed situation and the 40 percent threshold, Unocal review if it applied, would likely be satisfied. This may be another reason for the 40 percent number — it prevents an argument that this issuance was preclusive or coercive. Ultimately, though, I can’t see these parties (Mel Karmazin, the chief executive of Sirius, and John C. Malone, the chairman of Liberty) caring too much about this risk. Still, the lawyers may have played it safe. Go to the Sirius Form 8-K from the Securities and Exchange Commission http://idea.sec.gov/Archives/edgar/data/908937/000093041309000841/c56660_8k.htm ------------ Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. His columns are available at The Deal Professor blog. -- ================================ George Antunes, Political Science Dept University of Houston; Houston, TX 77204 Voice: 713-743-3923 Fax: 713-743-3927 Mail: antunes at uh dot edu *********************************** * POST TO [email protected] * *********************************** Medianews mailing list [email protected] http://lists.etskywarn.net/mailman/listinfo/medianews
