The owners of satellite radio leader Sirius XM Canada Holdings Inc. have made an offer to take the business private, but the proposed deal is already facing opposition from minority shareholders who feel the price is far too low.
Some investors have also raised questions about the governance behind the proposal, which offers $4.50 a share in cash or stock, with an option to take shares in Sirius XM Holdings Inc., the U.S. custodian of the Sirius XM brand. The U.S. company owns 32 per cent of Sirius XM Canada and licenses its content north of the border.
Sirius XM bids to take Canadian business private (BNN Video)
Executives at the Canadian company, which has nearly 2.7 million subscribers, said the proposal represents a 22.3-per-cent premium on its “unaffected closing share price on February 11, 2016.” That evening, The Globe and Mail first reported the company’s plans to go private at a tentative price of $4.25 a share, and the next morning the company released a short statement at the request of regulators confirming it was in early discussions.
But the deal, which was formally announced on Friday and needs approval from shareholders and regulators, arises against a backdrop of uncertainty about the renewal of a licensing agreement between the Canadian and American companies, as well as tension arising from a year-long dispute about fees.
“Having us become more closely aligned with the U.S. is going to allow us to be much more competitive today and into the future,” said Mark Redmond, president and CEO of Sirius XM Canada, in an interview. “It takes away any uncertainty around the licence negotiations.”
Four institutional shareholders reached by The Globe balked at the offer, however.
“We are highly disappointed,” said Benot Durand, partner and senior portfolio manager at Montreal-based Van Berkom and Associates Inc., a large minority shareholder in Sirius XM Canada. The offer is “undervaluing the company by a wide margin.”
The proposal also halts dividend payments for at least two quarters, which Van Berkom senior analyst Gabriel Bouchard Phillips called “highly abusive.”
“It’s a very low offer price, and I don’t think the independent members of the board did a good job maximizing shareholder value,” said Stephen Takacsy, chief investment officer at Montreal-based Lester Asset Managaement, which owns nearly a million shares.
A spokesperson for the U.S. Sirius XM declined to comment.
Under the proposal, the Canadian Broadcasting Corp. plans to sell its 12.5-per-cent stake in Sirius XM Canada, worth about $58-million at $4.50 a share, but keeps a programming partnership with Sirius XM Canada through 2022. The CBC sees the deal as “a good opportunity to monetize our non-core investment” and will vote for it, president Hubert Lacroix said in a statement.
The next largest Canadian shareholders – Slaight Communications Inc., which was built on radio assets, and Obelysk Media Inc., owned by Canadian businessman John Bitove – plan to consolidate their control. Each would emerge with 33.5 per cent of Sirius XM Canada’s voting shares and 15 per cent of its total equity, keeping the company onside with foreign ownership rules. The American Sirius XM would own the remaining equity.
To negotiate the offer, Sirius XM Canada struck a special committee of the board. The committee, led by chairman and veteran media executive Tony Viner, included Guy Johnson, the former chairman of Sirius Canada Inc., who was also the American company’s head of marketing in the early 2000s.
The committee solicited two fairness opinions, from Ernst & Young LLP and National Bank Financial Inc.
The proposal to go private needs approval from the Canadian Radio-television and Telecommunications Commission, the federal broadcast regulator, and needs votes from 66<AF>2/3<XA> per cent of all shareholders, as well as a majority of all minority shareholders, excluding Slaight, Obelysk and the American Sirius XM.
The relationship between Sirius XM Canada and its U.S. counterpart hasn’t always been smooth. Last June, David Frear – chief financial officer of the U.S. company but also a member of the Canadian firm’s board – told an audience at a media conference of his desire to “raise, and probably raise significantly” the royalties that Sirius XM Canada pays to the U.S. parent.
And a year-long dispute over the way activation fees are calculated in a current contract – the Canadian company pays the U.S. arm when an XM satellite radio is activated for the first time in a new car, for example – came to a head in late April. American Sirius executives demanded $33.9-million (U.S.) in retroactive payments, to which Sirius XM Canada replied that it would seek arbitration. The Canadian company’s stock price fell from $4.60 (Canadian) to $4.20 overnight.
“It shows a lot of tension. And obviously, the U.S. parent holds a lot of big sticks. That’s what you pay independent board members the big bucks for – is to stand up to any type of abuse,” Mr. Takacsy said.