Could Sirius-XM’s tax losses help Malone?
Rose Major 22-02-2009

Or, ‘everyone needs a good tax lawyer’. The recent $530m commitment from John Malone’s Liberty Media towards Sirius-XM might end up costing Malone the total of Zip, Zero or Nada in terms of actual cash. It is all because of Sirius-XM’s accumulated $6bn of tax losses.


SEC filings show that Sirius-XM has at least $6bn in locked in tax losses. While they sit on Sirius-XM’s balance sheet they have no value, at least until the pay-radio broadcaster starts making real profits. But in the hands of another player, like John Malone (or Charlie Ergen/Echostar) who own rich and profitable businesses, they then become wholly deductible against those profits.

Indeed, Sirius-XM’s appeal to Malone (and Ergen) may not have been its 19m subscriber base, or its orbiting satellite assets, or long-term prospects as an adjunct to DirecTV or any other ‘jam tomorrow’ scheme. Sirius-XM’s greatest asset, in fact, is its tax losses.

Those $6bn of losses, if absorbed into a business like Liberty Media, could be offset, say the taxation experts. BUT the American Internal Revenue Service (IRS) has rules that forbid such an acquisition, called the ‘trafficking in losses’ regulations. The IRS rules imply that Sirius-XM could tap into those losses at a rate of some $580m a year for 5 years, then falling away to some $250m a year (and then for a further 15 years). In other words billions could be exploited but only over a long stretch of time.

The IRS has another rule in place which says that the acquiring company can only take advantage of losses if they own more than 50% of a business. Worse, Sirius-XM has limited Malone’s stake to 40%, at least for the moment, and cannot rise to more than 49.9% over the next 3 years. In other words Sirius-XM’s tax position is safe for the moment. But that could change.

Meanwhile, a couple of bank reports on Sirius-XM give the broadcaster an upbeat summary. Vijay Jayant of Barclay’s, in his report on Liberty, believes that the Liberty Capital loans to Sirius XM give LCAPA upside optionality and downside protection. He says that the 15% interest rate terms of the deal are attractive for Liberty as they carry a senior capital structure position. In his opinion, Liberty’s investment in Sirius-XM is more for a financial investment, and will not involve Liberty becoming closely involved in the day-to-day operation of the broadcaster, nor does Liberty plan to force a DirecTV/Sirius merger, either operationally or financially.