Why Would Liberty Want to Own Sirius XM?

John Malone has plenty of reasons to love satellite radio. Some of them wouldn't matter to us regular Joes.

Every Sirius XM (Nasdaq: SIRI  ) investor knows that Liberty Media (Nasdaq: LMCA  ) owns a 40% stake in the company. It's not obvious from ownership reports in services like Yahoo! Finance because Liberty's stake isn't made up of plain old shares. Instead, it's a large batch of preferred shares, convertible into regular shares and with all the voting and dividend rights of the fully converted holdings. Malone is Liberty's chairman.

Liberty has agreed to stay below a 49.9% Sirius stake until March 2012. With that date approaching fast, you have to wonder whether media tycoon John Malone wants to take over the satellite radio business.

At Liberty's annual investor and analyst meeting in mid-November, Liberty sure left the door open for a big move. "There are few businesses that I have as much confidence in," said Liberty CEO Greg Maffei. "Boy, it's got a heck of a tailwind behind it."

Love is all around
Some of that confidence might come from Liberty's pleasant history with Sirius. That boatload of preferred shares was created right after Lehman Brothers went belly-up and the Sirius-XM merger still smelled of wet ink. Sirius was in dire need of capital but borrowing was difficult and expensive. In rides Malone on a white horse, saves the day, and reaps a massive reward as share prices rebounded something fierce from that low point:

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Sirius XM Radio Stock Chart by YCharts

The balance sheet is still shaky but improving, and Liberty would rather rip up that old agreement than let one of its most profitable investments fail. Not that it's necessary -- Sirius is barely GAAP profitable, but actually has strong cash flows nowadays. Amortized costs of pricey satellite launches help keep the tax man away.

And that's exactly why Malone would love a bigger bite of Sirius.

Tell me more!
Malone loves cash flows and hates paying taxes. Sirius' history of negative earnings and recently found positive cash flows bring together the best of both worlds. The company has nearly $10 billion in accumulated deficit from net operating loss carryforwards. Liberty paid $541 million to Uncle Sam over the past year; a tax credit pool like that could keep the tax man away for many years to come.

Sirius CFO David Frear explains that Liberty would need to own at least 80% of the company in order to take advantage of these credits, or about double its current holdings.

That would cost about $2.6 billion at today's share price, plus a bit of a bid premium to get investors to part with their shares. Liberty doesn't have that kind of cash available, but debt is cheap now and Liberty doesn't have any -- yet. This could happen, and March is just around the corner.

Blink and you'll miss it
That being said, Frear dodged questions about a possible Liberty boost at this week's UBS media conference. "In terms of what are their intentions with respect to going north of 50%, I really don't know," he said. "You would have to ask Greg."

If Liberty's top brass really believe in the Sirius opportunity, they should start dropping stronger signals over the next few months. We'd see the company raising capital, and perhaps trying to integrate other major holdings such as Barnes & Noble (NYSE: BKS  ) into the Sirius story (XM on your Nook, anyone? A B&N-sponsored satellite channel of audio book readings?). Malone needs to lay the foundation before building a bigger deal.

To keep an eye on Malone's intentions, you should add the Liberty family of tracking stocks to your Foolish watchlist. In just one click, you'll get an instant handle on Sirius, Liberty Capital, and both of the Liberty Interactive (Nasdaq: LINTA  ) (Nasdaq: LINTB  ) share classes. You won't find that kind of convenience anywhere else.