History may be written by winners, but don't underestimate the litigious sway of losers.
It's been nearly three years since Liberty Media's (Nasdaq: LMCA) John Malone emerged victorious over EchoStar's (Nasdaq: SATS) Charles Ergen in their attempts to rescue Sirius XM Radio (Nasdaq: SIRI). A lawsuit that Sirius XM can't seem to shake accuses the satellite radio giant of taking the wrong deal.
Facing debt repayment milestones in February 2009 that it couldn't afford to pay, Sirius XM needed a sugar daddy -- fast. Ergen was buying up the company's debt, positioning himself for a say in Sirius XM's future if it were to file for bankruptcy. He also offered Sirius XM a more conventional financing lifeboat in exchange for control of the company.
Malone stepped in with an offer that would give the company the money it needed -- and then some -- at a stiff 15% interest rate, but also required that Sirius XM surrender a preferred share stake for 40% of the company. The lawsuit claims that Sirius XM chose the inferior Liberty deal, primarily because it meant that CEO Mel Karmazin and his cronies could keep their jobs.
The accusations are interesting. Sirius XM investors are paying the price for the equivalent of roughly 2.6 billion shares that were handed over to Liberty. If Sirius XM's financial performance was divided into less than 4 billion shares, instead of the fully diluted 6.5 billion shares, its stock price would be closer to $3 under the same market cap valuation. However, it's hard to quibble about money left on the table when the stock has been one of the market's biggest winners since Malone's rescue.
Sirius XM has been no stranger to the courtroom these days. It's been fending off claims of fraudulent advertising and wrongful price hikes. It's still battling it out over claims of unpaid bonuses to its biggest celebrity, Howard Stern, but that's not necessarily a bad thing. Anyone who has relished Stern's shows during his terrestrial days knows that a happy Stern is a boring Stern. Giving him the opportunity to rage against the suits is just good radio.
However, shareholders would probably be happier if Sirius XM didn't have to feed so many attorneys.
If you want to see how the Sirius XM story plays out, add Sirius XM Radio to My Watchlist.
