A number of Sirius XM Canada Holding Inc.’s largest independent shareholders are voicing their disapproval of the company’s decision to go private, saying the deal undervalues the satellite radio operator and that the process was highly flawed.
“It’s inappropriate and completely nonsense that we would see this type of bid,” said Paul Gardner, a partner and portfolio manager at Avenue Investment Management, whose firm is among Sirius XM Canada Holding Inc.’s (XSR/TSX) most significant shareholders. “My mission is to squash this.”
The transaction, which was approved by both Sirius Canada’s board and a special committee, will see its U.S. parent, Sirius XM Holdings Inc. (SIRI/Nasdaq), and two existing Canadian shareholders, pay $4.50 per share, or $351 million, to buy out other minority shareholders. The CBC, which owns about 12.5 per cent of the Canadian entity, plans to support the offer and sell all of its shares.
Independent shareholders say that not only is XSR worth much more than $4.50 per share, but claim that the best interests of investors have been ignored for months, in particular since an offer for the company surfaced earlier in 2016.
“There are lots of reasons to believe this is not a fair transaction,” said Benot Durand, senior portfolio manager at Van Berkom and Associates Inc., another one of XSR’s leading shareholders. “We have a fiduciary duty to our clients to maximize their investment. Obviously here, this is not happening.”
One of the biggest complaints voiced by leading investors is the apparent conflict of interest at the board level, where the two Canadian shareholders involved in the buyout, Slaight Communications Inc. and Obelysk Inc., are represented by David Coriat and John Bitove, respectively.
The transaction would see Slaight and Obelysk Media end up with a combined 67 per cent voting position, in line with Canadian ownership requirements. They will each have 15 per cent of the equity in the business, with SIRI owning the balance of votes and equity.
“We are highly disappointed,” Durand said. “Because of the structure of the board and the special interests of people there, the board didn’t do its job. It was not working for independent shareholders in this particular case.”
The whole point of Canadian ownership requirements is to protect Canadians from this type of thing happening
Another source of contention is a fee dispute that surfaced in late April, when Sirius Canada announced that its U.S. parent was demanding a payment of US$33.9 million relating to activation fees under their 10-year licence agreement.
Investors say the lack of an adequate response from management shows that the Canadian entity was not really independent.
“The whole point of Canadian ownership requirements is to protect Canadians from this type of thing happening,” said Don Simpson, portfolio manager at Dynamic Funds, another major XSR shareholder. “The whole process has been a joke. The governance concerns as a Canadian shareholder are ridiculous.”
He’s not happy with the bid, but isn’t surprised it ended up being so low, particularly given his belief that XSR’s management has been overstating capex requirements for next year.
“It’s very convenient that they’re buying it when the capex cycle is done and the business is starting to generate lots of free cash flow,” Simpson said. “Then they hold a gun over XSR’s head with new negotiations of contracts. It really smells terrible.”
He, like many other shareholders, didn’t invest in XSR as a takeover candidate. Rather, he liked the company for its fundamental merits. It generates lots of free cash, and is one of the only growth companies in Canadian media.
“This should be a time when the shares are soaring, but XSR management has continued to talk the stock down,” Simpson said, noting the company’s decision to highlight potential challenges with its negotiations with SIRI.
“As a Canadian, I’m embarrassed from the government standpoint. The board should also be embarrassed,” he added, pointing to XSR chairman and special committee lead Tony Viner, the former president of Rogers Media. “I’m very disappointed with him staying on the board throughout this process.”
The other two independent directors on XSR’s special committee were Guy Johnson, a previous chairman of Sirius Canada, and Christine Magee, co-founder of Sleep Country Canada.
Keith Graham, president and portfolio manager at Rondeau Capital, one of XSR’s largest shareholders, echoed some of those concerns.
“We have grave concerns with the governance process involved in the transaction,” he said. “We think the bid is significantly below the value of the company.”
XSR was trading above $6 per share in early March 2015, but fell to about $3.50 near the end of the year.
As a Canadian, I’m embarrassed from the government standpoint
Several investors said they were unhappy with what they perceived as negative comments made by SIRI about XSR during this time, and the lack of an adequate response from the Canadian entity’s management team.
“The Canadian management has always been weak. They are just playing out what the U.S. masters are telling them to do,” Gardner said. “You have conflicted voters in the large shareholders, because they are not being economically impacted. They are being positively impacted and they get to keep their ownership, while public minority shareholders are being taken out a deep discount of probably 40 to 50 per cent.”
Things appeared to take a turn for the better for the stock price when a Feb. 12, 2016 media report suggested XSR had received a $4.25 per share takeover bid. The shares moved has high as $4.70 in the following weeks in anticipation of a higher offer, but when the fee dispute with SIRI came to light, the stock retreated below the rumoured price.
This was despite strong operating results at XSR: On April 6, the company reported a record self-pay subscriber count and its highest second-quarter EBITDA to date.
Mark Redmond, president and chief executive officer of Sirius Canada, is confident in the merits of the deal.
“From my perspective, it’s kind of a win-win all around,” he said. “This is good for the long-term business, our subscribers, our shareholders and our employees.”
While the offer price is just six per cent higher than XSR’s closing price on Thursday, Redmond noted that the bid represents a premium of more than 22 per cent relative to where the stock was trading on Feb. 11, the day before XSR announced that it had been approached.
“I think the formation of the special committee, the due diligence process they followed, and the advice and counsel they received, were all in line with what our legal requirements are,” he said. “From my perspective, I think they’ve done what a special committee’s mandate is to do.”
XSR shares climbed eight per cent, or 34 cents, to $4.57 in Toronto trading on Friday.