Value of Sirius XM may be in the billions it lost

Some investors are baffled why media titans John Malone and Charles Ergen are competing to throw money at Sirius XM Radio, the money-losing satellite-radio company that was perilously close to bankruptcy.

But the company's most valuable asset could be precisely all the money it has lost.

Sirius XM has at least $6 billion of tax losses. That means that the losses it has accumulated over the years can be used as deductions to cut taxes on future profits. As long as those losses stay with Sirius, they have little value, because the company's future prospects for significant profits are still slim.

But in the eventual hands of another company, like Malone's Liberty Media, those tax losses could become extremely valuable, helping to wipe more than $6 billion in taxable income off of its income tax returns -- thus some day cutting Liberty's corporate income-tax bill by more than $2 billion.

Tax concerns are often a big driver of corporate deal making, but few players maneuver through the tax code as thoroughly as Malone. In 2006, he acquired the Atlanta Braves in a way that enabled Liberty to effectively cash out its stake in Time Warner without incurring taxes.

Similarly, Sirius's tax losses are considered a key part of the company's appeal to Liberty. They were considered less significant to Ergen, who bought up Sirius debt in hopes of adding Sirius to his satellite assets. On Tuesday, Liberty announced it would rescue the company from a bankruptcy filing with a $530 million loan and receive a 40% stake in Sirius.

Companies often have tax losses. But experts say it is unusual that they are potentially a firm's most valuable asset, as with Sirius. The only asset that is comparable is the company's collection of radio wave spectrum licenses granted by the FCC valued at $2 billion.

However, for Liberty to maximize the use of those tax losses, it must navigate Internal Revenue Service rules intended to prevent companies from acquiring others solely for their losses -- so-called "trafficking in losses."

The IRS curbs already kicked in after the Sirius XM merger was closed in last July and limit how much of the losses can be used as tax deductions each year.

Another complication hangs over these tax losses. If ownership of the company changes again, the use of the tax losses would become even more limited, according to IRS rules. That is because the restrictions are calculated based in part on the market value of the company -- which is roughly 10% of what it was when the Sirius XM merger closed.

There is an additional wrinkle: If another investor purchased enough stock to give it a stake of 5% or more during the next three years, that could combine with Liberty's stake to trigger those restrictions anew. Sirius can implement trading restrictions to prevent that. At current values, a new restriction on the losses could cause Sirius to lose about 80% of its tax losses over the next 20 years.

Without those changes, Liberty would then be free to acquire the rest of Sirius in three years and use all the losses to shelter taxable profits elsewhere. (info from The Wall Street Journal)