VP Patrick Donelly & President Scott Greenstein have sold stock,CEO Karmazin to do so


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Wackbag Staff

2/26/2012 @ 1:31AM
Sirius XM's Karmazin Suddenly Selling Half His Stock, But Not Until April!
by Joan Lappin

Liberty's John Malone at Sun Valley

During February, SIRI’s CEO Mel Karmazin announced plans to sell about half of his SIRI holdings. Remember, Mel had high priced options before he and David Frear, the CFO, almost put the company into bankruptcy in 2009 with some horrifically bad decisions on refinancing before Lehman went down for the count. So they gave the useless options back to the company in favor of lavish new ones at $0.43. That was after Liberty Media and John Malone swooped in with $575 million in loans and share purchases that left Liberty with 40% of Sirius XM now.

Malone lives his corporate life (and one presumes his personal life, too) doing anything he can to avoid paying taxes. I’m sure one of the big attractions to Liberty when it saved Sirius XM was the latter’s huge tax loss carry forwards (otherwise known at NOL’s, net operating loss carryforwards) that can be netted out against corporate profits. But any change of control of an entity requires that 3 years elapse before a transaction unfolds that could unlock the use of those NOL’s. That 3 years is up in March 2012.

So who would expect major liquidations of holdings at Sirius by the very insiders who were so well papered with options at the worst of times for the company and its shareholders? Malone was handed a fabulous gift with the company on its ear and it is highly likely that the subsequent grant of excessive options was part of the quid pro quo at the time. I’ll wash your hand if you wash mine.

Consider some of the recent insider transactions of noteworthy size and the liquidation of a major filing position. There is clear expectation by those folks that Malone is not going to act soon and presumably nothing will push the stock higher.

Patrick Donelly, VP sold 9.2 million shares at 2.10 on 2/23 that were based on $0.67 options. His cost $5.2 million and the shares were sold for $19.5 million even though the shares have an additional 7.5 years before they expire.

The shocker was that on 2/17/12, CEO Karmazin announced that he “has adopted a trading plan in accordance with Rule 10b5-1 of the Securities and Exchange Act of 1934. The transactions that will take place under the plan are part of Mr. Karmazin’s strategy for financial planning in connection with his philanthropic efforts.

“Under the 10b5-1 plan, beginning in April 2012, Mr. Karmazin is expected to exercise 60 million options to purchase Sirius XM shares. Shares underlying the options will be sold to cover the price to exercise the options and the remaining shares will be sold with the proceeds delivered to Mr. Karmazin.” (We added the bold type for emphasis.)

“Following this planned sale of shares, Mr. Karmazin will still own over 68 million shares and options of Sirius XM.” True that’s not chump change but most of us could get by on the $135 million he will net out of the sale of the first half of his shares. And having watched the self aggrandizement over the last few years, we can fully expect the award of more options in the future.

On 2/14/12, President Scott Greenstein exercised 6,942,034 shares of the delicious $0.43 variety that cost him $2,985,075 and that he sold at $2.15 for $14,953,141.

We also learned in February that George Soros’ Soros Fund Management has liquidated its position in Sirius XM in recent weeks.

While the others have sold already, Karmazin appears to be playing it cagey. If Liberty does do something in March, he’ll still own his shares. Now 68, Mel has stated publicly that he doesn’t want to hang around as a second banana. Maybe charity will become his new endeavor. When announcing 2011 results, management led investors to expect a very tepid year of net new subscriber growth despite the fact that auto industry executives expect continued recovery to a 14 million car year, up from 13 million in 2011. At this point, about 2/3’s of all cars come down the assembly line equipped with satellite radio receivers further tilting toward better uptake by new subscribers. On the other hand, the first price increase in the history of satellite radio is unrolling now and there is some concern about whether or not churn will increase.

In reviewing my old notes from four years ago, Karmazin was quite convinced that in order to become a factor in selling national advertising on satellite radio they would need more than 20 million subscribers. Now with 21 millions subs, talk of that revenue stream is not much mentioned anymore. This is now a story of years of cost cutting and grinding away at increasing the number of subscribers. It isn’t exactly rocket science and the question is can someone else run the company who maybe isn’t so greedy about lining his own pockets and those of his immediate inner circle with cheap options. One has to wonder why the CEO and the President are in such a rush to sell half their holdings. If they were expecting a big price increase anytime soon, they surely wouldn’t be selling now.

Maybe we were wise to sell half our holdings, too, last July at higher prices than prevail now. Beware the Ides of March. They are almost upon us. Who knows what John Malone has up his sleeve.

Joan E. Lappin CFA Gramercy Capital Mgt. Corp.

In these turbulent times, put our decades of experience to work for your portfolio. This article reflects the level of original thinking that goes into our stock selection process. Please contact us at info@gramercycapital.com. You can follow Joan at twitter.com/joanlappin

Mrs. Lappin, Gramercy Capital and our clients own shares in Sirius XM Satellite Radio .


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