UPDATE 3-Malone and Karmazin face off for Sirius XM control

Thu May 31, 2012 5:12pm EDT

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By Liana B. Baker

May 31 (Reuters) - Liberty Media Corp's John Malone and Sirius XM Radio Inc's Mel Karmazin are using the regulatory system to go to war over control of the satellite radio company.

Liberty, which already holds five of 13 Sirius XM board seats, said in a regulatory filing Thursday morning that it wants to take over a majority of Sirius' board--a disclosure Malone made without informing Karmazin.

Sirius XM shot back in its own regulatory filing Thursday afternoon that it has been in discussions with Liberty about transactions related to Liberty's stake in the company but had not reached an agreement or been informed of Liberty's plans to shake up the board.

Sirius XM's filing further noted that new directors could not be added to its board without a special meeting that can only be called by two current directors or the chief executive. A proposal can also be made at the annual meeting, but that is at least a year away. Meanwhile, replacing the entire board would "require the consent of a majority of our outstanding common stock," Sirius XM said.

Both companies did not respond to requests for comment on Thursday.

Liberty's new plan is "very likely to succeed," Lazard Capital Markets analyst Barton Crockett said in a research note. With control of the board, "Liberty may retain its stake long enough to transition to a new CEO," Crockett said.

Malone, a cable industry pioneer who Al Gore famously derided as "Darth Vader," is no stranger to battles with media titans. The reclusive billionaire has faced off with News Corp's Rupert Murdoch numerous times, and in 2008 nearly brought a two decade-long friendship with Barry Diller to an end by trying to gain control of his IAC Corp. Liberty, which held a large stake in IAC at the time, ultimately failed in its bid, but made Diller endure an ugly court battle in the process.

Englewood, Colorado-based Liberty in its filing Thursday also asked the U.S. Federal Communications Commission to reconsider a May 4 refusal of Liberty's previous application to take control of Sirius. Liberty said it plans to convert half of its preferred shares to common stock and hold about 32 percent of outstanding shares.

Earlier this month, Liberty raised its stake in Sirius to 46.2 percent from 40 percent as it bought another 60.35 million shares but did not announce its plan to convert to common stock until Thursday.

NOT GOOD AT BEING NO. 2

Malone's attempt to gain control of Sirius goes to the heart of Karmazin's biggest fear as a corporate executive--not being in control of his own destiny.

The Sirius XM leader rose to fame in media and Wall Street circles as the CEO of Infinity Broadcasting and CBS Corp . But, after merging CBS with Viacom Inc, Karmazin felt stifled as the second-in-command under the combined company's controlling shareholder, Sumner Redstone. Karmazin, known for his hard-charging sales techniques, repeatedly clashed with Redstone and quit after just three years.

"I'm not really good at working for somebody. I just could not be a No. 2," Karmazin admitted to Reuters last year.

Earlier this month Karmazin said he would "protect the rights" of Sirius's shareholders and would not want Malone seizing the company without paying a premium.

Gabelli & Co analyst Brett Harriss said Malone does not necessarily want to push out Sirius management. Instead, he thinks Malone, who holds a PhD in mathematics and is known for his Byzantine deal structures, may simply be trying to design a complicated deal with Sirius XM to save on taxes.

"It doesn't mean Mel (Karmazin) will leave but it means that Liberty will control the board and Liberty and Sirius can put together a Reverse Morris Trust transaction," Harriss said.

Such a transaction could allow Liberty to spin out its Sirius stake and combine it with the rest of the company as a way to distribute Sirius shares to Liberty Media shareholders in a tax-efficient manner, according to Harriss.

Malone engineered a similar deal in 2009 with satellite TV operator DirecTV.

Liberty owns stakes in a variety of businesses, including book retailer Barnes & Noble Inc, concert promoter Live Nation Entertainment Inc, and cable television company Discovery Communications Inc.

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 company Liberty rescued in 2009 is in much stronger shape four years later, thanks in no small part to Karmazin. 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. The company, which serves as the radio home for shock jock Howard Stern, ended last quarter with an all-time high 22.3 million paying users.

Sirius XM shares were unchanged at $1.89, while Liberty fell 0.7 percent at $83.08.

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