While Sirius XM investors are dancing a jig today, there are several things that need to be considered going forward. The deal definitely gives Sirius XM breathing room, and has a potential to bring about some interesting dynamics, but in the end there is a cost to this deal, and that does need to be contemplated.
Perception means a lot. For months, the debt of Sirius XM Radio has been a focal point in nearly every headline and story about the company. Even when good news was announced, the under-tow of debt acted like an anchor for the equity. With the debt issue resolved, the company can now enjoy stories and headlines that no longer speak of the debt. For investors, this is a good sign, as the main focal point will be the positive news rather than looming debt. With Liberty coming to the game, the perception associated with this company can now improve.
What we know is that Liberty will get control of about 40% of the equity in Sirius XM Radio. At this point there are not enough authorized shares to make this happen. The company does have authorization to bring the authorized share count up to 8 billion shares. Some dilution will need to happen to get Liberty their stake in the company. While exact figures are not available, the company will need to end up in the neighborhood of between 6 billion and 6.5 billion shares in the market. The good news is that it looks like the share count does not have to get to 8 billion mark, but dilution will need to happen.
As part of this deal, the Board of Directors will see some changes. It would appear that Liberty will get a minimum of two board seats. This should inject some fresh ideas into the direction of Sirius XM Radio. Liberty Media has several outlets that could well work in synergy with Sirius XM Radio. Content deals could take on a new flavor, and package bundling is another viable option as the company moves through 2009 and into 2010. While a Board of Directors does not manage the company, they do carry influence on the activities of management. For some investors, who have been critical of the current board, the knowledge that there will be some new influence seated at the table should be welcomed news.
DEBT STILL EXISTS
The fact o the matter is that the company still has debt. Going forward, there will still be payments and interest that will carry an impact to the bottom line. Should the company see successes and good cash flow, there is potential that Sirius XM can begin to retire debt. Prior to the merger, XM had made several prepayment moves with their debt, and the stock typically responded in a positive manner. The debt clouds are more distant no, but they still exist. Investors need to bear this in mind.
This piece of the puzzle is still on the table. The company has the right to conduct a reverse split at any point during 2009. While this initiative was theoretically enacted to stave off a delisting from NASDAQ, the requirements of the exchange have been relaxed, giving the company some time and wiggle room. However, if the company remains below $1, there could well be a point in time where Sirius XM Radio does need to enact a reverse split.
In the end, there are still many things for investors to consider when contemplating their existing investment, or making the decision to become invested. For now, investors can dance a jig, and enjoy the fact that the company is much further away from possible bankruptcy.
Position: Long Sirius XM Radio