Saturday, March 03, 2007

Clarity On The "Breakup Fee"

March 3, 2007

The merger has been announced, and Sirius and XM are holding hands in an attempt to bring satellite radio together in a marketplace bombarded by terrestrial radio, I-Pods, WIFI, WIMAX, Internet radio, etc.

One aspect of the merger agreement is a $175,000,000 break-up fee. There seems to be a good deal of confusion attached to this. The "break-up fee" applies to both companies, but more specifically is tied to specific scenarios:

1. If one Board of Directors or the other rejects the merger, the company rejecting the merger will owe the other company $175,000,000. Both boards have already approved the merger, and thus this step is behind us. It is always possible that one of the two boards could change their mind, but this is highly unlikely.

2. If one set of shareholders rejects the merger, the rejecting company would be responsible to pay the other company $175,000,000. Again, this is highly unlikely. Nine institutions control over 50% of XM's stock, and the decision relative to a merger rests in the hands of very few. It does not take a rocket scientist to realize that these major shareholders were likely probed as to how they would react to a merger. In Sirius' case, institutions control over 30% of the stock, and again, the sentiment of the major players is likely known. Most retail investors will likely not even vote, which means that the Board gets to vote with those shares. In my opinion, there is very little risk that either set of shareholders will reject the merger.

That is it. Those are the conditions of the "break-up fee". If the merger is denied by the government, neither Sirius nor XM will owe anything to each other.

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3/03/2007 09:00:00 PM

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