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Position: Long Sirius
Now that the merger between Sirius and XM is complete, it is now time for everyone to focus what what will happen going forward. For those that listen to SiriusBuzz Radio, you have heard me discuss some of this potential before. This piece will focus on the OEM potential.
Each year 15,000,000 cars are sold in the United states. Some manufacturers have satellite radio as standard equipment, while some are barely getting started with SDARS installations. Up to this point we are familiar with promotional periods, take rates, and OEM subsidies.
The basic structure of the satellite radio deals with auto manufacturers involves satellite radio subsidizing the radios as well as installations. In return, the OEM’s for the most part pay part of the promotional period subscription. The consumer is exposed to satellite radio for “free” for a period of time. Half of those exposed to the service elect to become self paying subscribers. Those self paying subscribers generate revenue, and a portion of that revenue is shared with the OEM.
One of the problems with this business model is that all of those consumers that elect to forgo satellite radio represent costs for subsidies, etc. and no revenue for either the satellite radio company or the OEM going forward.
What if there were to be a shift in the OEM business model?
It seems that satellite radio can not let a day pass without speculation or someone reading more into a statement than is really there. Today on CNBC, Mel Karmazin spoke with David Faber in a brief interview that discussed in general terms the closing of the merger, and where the company is headed.
Mel stated many things that people seem to have overlooked because at the end of the interview, Faber inquired as to whether the company would conduct a reverse split. Mel’s statement that the cash flow of the company is how it is run fell on deaf ears. The fact that $2.2 billion in revenues have been generated over the past 12 months, or that aside from a satellite launch in 2009 the company would be in positive territory in 2009 might as well have been stated in a foreign language, because all everyone wants to talk about is a reverse split. Even Motley Fool wrote about it with a headline that was sure to pique some curiosity.
The reason some seem to want a reverse split is so that they can get the stock price to what they feel is a more respectable level. The function of the split does nothing more than bring down the amount of shares by way of increasing the value of those share. If an equity trading at $1.60 were to do a 4 to 1 reverse split, the number of outstanding shares would be divided by 4, and the price multiplied by 4. In theory the event is neutral, but perception also matters. Most reverse splits are not seen as a good thing. It is a move that companies sometimes use as a last resort to make their shares more attractive.
A few days ago, I touched on the fact that the much touted 4oo million dollars in synergies was a low ball figure. In an interview on CNBC today, Citi analyst Tony Wible agreed with me that the estimates are in fact conservative.
You may not have noticed it, but Tony makes a good point in the interview. He points out that auto sales have been declining for the last four years, yet Sirius (and Xm) managed to grow over the same period. I am now questioning why it is the street insists on tying satellite radio sales, with auto sales. It’s obviously a failed indicator.
Now that I have that out of my system, I had a thought regarding the synergies. We have all heard of the cost cutting benefits and the improved ad sales that may come. For a moment, I’d like to think outside of the box. After listening to Mel’s interviews today, it seems to me the company is less concerned with what will happen and is much more focused on what can be done immediately to improve its balance sheet.
Sirius Xm has a pool of nearly 20 million potential new subscribers that can be gained in this quarter in the form of former subscribers! At first you may think it impossible. I beg to differ. How many people canceled their XM service when Nascar moved to Sirius? How many GM owners would like Howard or the NFL? How many Ford owners would like Opie & Anthony, or Major League Baseball? With the best of both Sirius and XM coming soon, this is an obvious company resource.
A marketing campaign directed at this immense pool of potential subscribers through advertising, mailings and telemarketing could reap huge rewards. There are so many benefits to the merger that we can only begin to imagine the possibilities. Subscribers could potentially double in a single quarter. Now that won’t happen because Grandma is probably not going to pay for satellite radio for the 35 minutes she spends in the car each week.
Yet the resource exists, and unlike the outer shelf and Anwar, there is nothing stopping us from tapping it. Additional “re-subs” together with increased penetration would knock Wall Street naysayers on their rears, and it it could be implemented right NOW. The road to profitability may prove to be paved, ironically, with years of lost subscribers.
Position: Long Sirius.
In an interesting move that will further help clean up the merger process, XM Satellite Radio Inc., a wholly-owned subsidiary of SIRIUS Satellite Radio Inc., announced today that it is offering to purchase for cash any and all of its outstanding 9.75% Senior Notes due 2014 (CUSIP No. 98375YAS5) (the “Notes”), on the terms set forth in the Offer to Purchase and Consent Solicitation Statement dated July 29, 2008.
The tender offer will expire at 12:01 a.m., New York City time, on August 27, 2008, unless extended. The total consideration for each $1,000 principal amount of the Notes validly tendered and not withdrawn will be 100% of the principal amount of the Notes. Holders whose Notes are accepted for payment in the tender offer will also receive accrued and unpaid interest up to, but not including, the payment date, expected to be promptly after the offer expiration date.
XM intends to use cash on hand to facilitate the purchase.
Position: Long Sirius.
The merger is finally here. After a long and drawn out regulatory process, the birth of Sirius XM Radio has many investors singing the blues. The question is how long the street will stay on the blues channel, and will the next channel be more upbeat?
With the converts arbitrage action panning out during the trading of yesterday and today, it may well be that the stock has stabilized, and perhaps even marked a strong bottom that should become a very strong support point.
Many investors still have various questions, and the process of the transition still has a few more days to unwind. XM shareholders will see their accounts have shares that are able to be traded by this Friday. Those that were short XM will need to settle their trade, as the short positions do not transfer over. The XM shares you borrowed to sell short were bought by someone else, who has already (in theory) converted them to Sirius. Because of this, Friday may be an interesting trading day that sector followers will want to watch.
The merger between Sirius and XM is no longer “proposed”. It is reality. As anticipated, Sirius and XM consummated their deal prior to the market opening today, and the company has a new name… Sirius XM Radio Inc.
Among the announcements this morning were:
Full press release after the jump…
While today’s trading action would be cause for concern to any investor, it always helps to understand the full perspective of what happens with converts, and why. Even some well known financial publications and analysts had confusion over the activity surrounding the equity offering today.
What investors should know is that holders of converts typically short the stock, thereby minimizing risk, and locking in the interest they are receiving as a profit. This strategy is not unique to Sirius, and in fact happens all of the time. Still, even understanding this likely does little to appease the frustration of investors who were hoping to see positive momentum on these equities.
Thus, if you are a frustrated investor, I do not blame you. But, lets take the next step and see what usually transpires. With the convert holders shorting, there are large numbers of shares hitting the market within a short period of time (from a few hours to a few days typically). This selling activity drives the price down, but in many ways, the sale is “artificial”. Think about it this way. The companies doing the selling are holders of converts. Because they have converts, they must have some interest in the company succeeding. Their sale is less about their sentiment on the company, and more about locking in a profitable position which allows them to continue to do business. Their play is the arbitrage of the trade.
The FCC has finally put the merger between Sirius and XM into writing. The documents, made public after 4:00 PM on July 28th outline the regulatory approval of the merger. Four of the five commissioners also offered published opinions on the vote.
This official document, the lack of any action by the National Association of Broadcasters, and what should be the final touches on financing issues should enable Sirius and XM to consummate the merger in the next few hours. When this happens, XM shares will no longer exist.
Full press release after the jump…
As an investor in both Sirius and XM, I was very concerned with the drop in price following an exceptional quarterly report and subsequent SEC filings relating to an Xm debt offering. What we are seeing today is a common arbitrage play with regard to convertible debt offerings called convertible arbitrage. Such offerings are an open invite to short the common stock against the debt.
These XM convertibles will be converted to Sirius shares. Because Sirius shares are not available to short against, it would have made placement of the debt securities impossible. By providing the shares, Sirius aides in their placement. This is not shorting as we think of in a normal sense. These shares were not on the market to begin with. Other traders are selling into this which is the cause of the decline.
In the Goldman Sachs report, they expected the debt offering to be over 1 billion dollars. Giving credit where credit is due, they saw this coming. However, the offering today is for only half the amount Goldman’s analyst Mark Wienkes expected, at only 550 million, which may suggest the stock’s decline may be short lived and over-exaggerated.
A company executive said that the offering is necessary for the completion of the merger and relates to xm’s refinancing needs. He also noted that as yet, there has yet been no official press release nor any paperwork signed regarding the merger at the FCC, and that it was expected to close by the end of business today. With this offering, XM’s debt restructuring is complete.
Also of importance is that the company believes that the NAB will not be filing for a stay of the FCC decision.
Position: Long Sirius, XM.
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