Deals and IPOs

Liberty to buy out Sirius, create flexibility for Time Warner Cable deal

Liberty Media's proposal to Sirius XM

Liberty Media on Friday said it would offer to buy out the minority shareholders in satellite radio provider Sirius XM Holdings, in a deal that could give cable mogul John Malone a freer hand in driving cable consolidation.

Liberty, which has a large stake in cable operator Charter, has made no secret of its pursuit of No. 2 cable provider Time Warner Cable. Liberty Media Chief Executive Officer Greg Maffei said that Friday's offer to make Sirius XM a subsidiary gives holding company Liberty the financial flexibility to pursue other deals.

Liberty's Maffei said in an interview that one scenario this deal allows for could be for Liberty to acquire more Charter stock. It currently owns 27 percent of Charter shares.

Maffei said that some think Charter has to maintain a high percentage of Charter stock "so it becomes a good operating asset for us and not an investment company asset."

(Read more: Comcast weighs threeoptions for Time Warner Cable)

John Malone
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"I'm not suggesting this is correct but one supposition could be that this allows us to go make incremental investments in Charter, to maintain our stake in Charter because we have access to the cash flow at SIRI and the borrowing capacity at SIRI. That's one way that (it) could help get the Time Warner Cable deal done," he said.

Maffei declined to comment on when Charter might make an offer for Time Warner Cable. Reuters has reported that an offer valuing the cable company at below $135 per share could come early this year.

Maffei told analysts on a conference call on Friday that Liberty Media's new market value after it absorbs Sirius XM will be $27 billion. This is up from its current market value of $16.6 billion.

Maxim Group analyst John Tinker said that Sirius XM is expected to generate $1.5 billion in earnings before interest, taxes, depreciation and amortization this year, which is additional cash now on Liberty's balance sheet.

(Read more: Time WarnerCable, Viacom renew distribution deal)

"What Liberty is doing here is giving themselves a big balance sheet, a huge gun. Now that Liberty Media is going up to $27 billion, suddenly Time Warner Cable doesn't look like such a big stretch," Tinker said.

Cramer's Six in 60: Buy Sirius

One of the challenges of a Charter-Time Warner Cable tie-up, is that Time Warner Cable is much larger than Charter, according to analysts. Charter, the No. 4 cable operator, has a market capitalization of around $13.6 billion, much smaller than Time Warner Cable's nearly $38 billion market value.

Liberty executives have so far said they prefer to use Charter as its agent of cable consolidation, but it has not ruled out involving Liberty in a transaction.

Sirius XM

Liberty's all-stock buyout offer for Sirius XM could be worth more than $10 billion, given that minority shareholders control about 46 percent of the company, which has a market capitalization of $21.5 billion.

Liberty Media became Sirius's majority owner in January 2013 after U.S. regulators gave it the green light to take control of the satellite radio operator. Malone, Liberty's chairman, is notorious for creating complicated, tax-efficient deals involving stock.

Liberty said on Friday each share of Sirius common stock would be converted into 0.0760 of a new share of Liberty's Series C common stock which has no voting right, the equivalent of $3.68 a share.

That figure is just barely above Sirius XM's closing price of $3.57 on Friday and Liberty Chief Executive Officer Greg Maffei said a special committee of independent board members would be formed at Sirius XM to look at the offer and that it might negotiate a higher price with Liberty. The deal is also subject to shareholder approval.

(Watch: WillApple & Google kill Sirius?)

Liberty said following completion of the deal, Sirius's public shareholders would own about 39 percent of Liberty's outstanding common stock.

In 2009, Liberty became the largest shareholder in Sirius after it floated the company a $530 million loan to help it avoid bankruptcy. Terms of that deal allowed for Liberty to convert the loan into preferred shares.

The financially strapped company Liberty rescued in 2009 is in much stronger shape five years later and has seen its shares skyrocket more than 2,600 percent over the past five years.

It has gained a key foothold in the vehicles market, which is seeing a rebound, with its radios in 70 percent of new cars in the United States.

By Reuters