Interesting take on the RRRR/MTNT deal from the Red Herring:
redherring.com
The Contrarian: Adventures of a junk bond king
By Christopher Byron
Red Herring
July 2, 2001
This article is from the July 15, 2001, issue of Red Herring magazine.
Here's what I want to know: what's a failing New York Internet consultancy got in common with a money-losing satellite company in Virginia -- except perhaps a one-time junk bond promoter who seems to think digital radio will be Wall Street's next darling?
Case in point: the recently announced merger of Rare Medium (Nasdaq: RRRR), a New York Internet consulting company, with Motient (Nasdaq: MTNT), an operator of wireless satellite services, headquartered in Reston, Virginia. These companies have little in common except a former Drexel Burnham Lambert junk bond financier named Leon Black.
In 1998, Mr. Black became an investor in Sirius Satellite Radio (Nasdaq: SIRI). Sirius is one of only two main competitors in a field known as digital radio, which may develop into something really big ... or into nothing much at all. Mr. Black, through his investment company, Apollo Advisors, now holds about 7.7 million shares in Sirius, making him the company's second-largest investor.
This is interesting in light of another digital-radio deal in which Mr. Black was recently involved: the merger of Motient with the above-mentioned Rare Medium, in which Mr. Black's group holds 44 percent of the outstanding stock.
Rare Medium's hodgepodge of businesses (Web hosting, consulting, startup incubating, and whatnot) was a money-losing proposition from day one, and no sooner did the dot-com bubble pop in March 2000 than the stock price dropped like a stone. By this June, Rare Medium was selling for less than a dollar.
By March 31, Rare Medium's only remaining asset of any real value was roughly $87 million in cash -- cash that the company desperately needed to conserve if it had any hope of riding out the dot-com downturn. But apparently Mr. Black no longer had any interest in the dot-com world; he was already eyeing digital radio as the next hot thing on Wall Street.
THE REAL TARGET
So, with his flanks secured through his stake in Sirius, Mr. Black began to close in on Sirius's only competitor: XM Satellite Radio (Nasdaq: XMSR), a Washington, D.C., company that, like Sirius, is trying to set up a nationwide, satellite-based broadcast radio network. He planned to get at XM by way of Motient, which had spun it off in a 1999 IPO and still held 25 percent of its stock.
To that end, on April 3, Rare Medium announced an agreement to invest $50 million of its cash in 12.5 percent junk bond notes issued by Motient, secured by XM stock -- something Rare Medium needed about as much as a bullet in the head. Then, on May 14, the other shoe dropped: Rare Medium announced that it would merge with Motient.
But the merger appears to have been only a means to an end for Mr. Black, since his real target seemed to be XM Satellite Radio. Rare Medium's Series A Preferred stock -- which, conveniently, all belonged to Mr. Black's Apollo group -- was exchanged separately for 9 million shares of common stock in Motient-controlled XM plus $13 million in cash.
This stipulation meant, in effect, that Mr. Black had used $50 million of Rare Medium's cash as bait in order to acquire for Apollo Group a 15 percent equity stake in XM Satellite Radio, worth $139.5 million at XM's recent price of $15.50 per share. As for Rare Medium's other stockholders, well, they got the booby prize: $58 million's worth of stock in Motient, a company that has itself lost 97 percent of its value since March 2000.
From which sad story we may draw a simple conclusion: when companies are controlled by money men from Wall Street, their own interests are not necessarily the same as those of the company or its other shareholders -- and when big money is up for grabs, you can imagine who will prevail. |
