A Deeper Look at the Sirius XM Liberty Deal
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.
HEADLINES
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.
SHARE COUNT
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.
NEW BOARD
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.
REVERSE SPLIT
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
even with dilution at 75%, I can make a strong argument for a $0.75-$0.80 price target as reasonable!
btw, that is a 9 month price target I gave . . not this morning boyz. just don’t want anyone to jump ugly on me!
Way to go mel u got help! Now get rid of jon zellner and his fm djs they suck i want to go back to music after music without hearing dj’s! As for all u posters this is a day to go up from here the deal is done no more crying like babies mel is a great ceo and this debt was done way before he got here and the only way to fix was to get help and thats exactly what he did he got help now this company can go in the right direction. Think about it the #1 satellite tv company in the world followed by the #1 radio company in the world its a great mix it will work!
This really may be a win win factor. 1)Having Malone invested is of course Huge. 2)With him and his people know on the board I would have to think w/ Malone’s MO he will bring in fresh ideas to Sirius Xm. 3)This would also help the company move from a fetal position to now having more of an ability to be agressive in marketing & strategies. The biggest hurdle know is the state of the economy. But know at least we’ve jumped from a sinking ship into a ship that can be as competitive as the other sea worthy ships in this rough climate.
Given the hand we were dealt a week ago, overall I’m very happy with the result today.
There are, however, a couple of factors brought out in the 8-k which we should all be aware of:
The first is that there is only a 3-year limit during which Liberty can not own more than 49.9% of the outstanding stock of Sirius XM. Obviously, after that, they can own more than 50% and vote their shares as they see fit.
The second is that the 40% of the outstanding shares is not 40% of the shares that exist at the time they convert their preferred shares which were given with this deal. If I am reading the 8-k correctly (and I think I am), first, their 40% is added in and then they get 40% of 140%. It is the wording “(after giving effect to such conversion)” which makes me think so.
Below is language from the 8-k which makes me think the above is correct. (Also, here is the link directly to the 8-k:
From the 8-k:
Phase Two: Investment Agreement
On February 17, 2009, we entered into an Investment Agreement (the “Investment Agreement”) with Liberty Radio, LLC (the “Purchaser”), an indirect wholly-owned subsidiary of Liberty Media Corporation. Pursuant to the Investment Agreement, we agreed to issue to the Purchaser 12,500,000 shares of convertible preferred stock with a liquidation preference of $0.001 per share in partial consideration for the loan investments described herein.
Upon expiration of the applicable waiting period under the Hart-Scott-Rodino Act, the preferred stock will be convertible into 40% of our outstanding shares of common stock (after giving effect to such conversion). Issuance of the preferred stock is subject to the satisfaction of certain conditions, including the conditions to funding under the XM Credit Agreement described below.
Pursuant to the Investment Agreement, we have agreed to various covenants and agreements, including not to solicit or encourage alternative transactions or, subject to certain exceptions, to enter into.
just wait to the conference call, hopefully then people will realize what malone realized when he threw all this money into sirius.
The day after the merger, there were about 3.3 billion shares outstanding (with convert dilution) and the market cap was about $5 billion. Much of the price decrease in the last several months is attributed to the threat of bankruptcy, especially after the market crash/credit crunch in October of last year. The dilution expected from the Liberty deal, plus the debt equity swaps over the last few months, will approximately double the number of shares from that day after the merger.
But when the economy and auto sales recover over the next several months, or next year, the company will have already realized the merger synergies, continued to grow, although slowly, and will be facing the prospect of positive cash flow and renewed growth. So will the company then be worth more than the $5 billion market cap it had just after the merger? I think so. Yes, with dilution that translates in 75 cents per share rather than the $1.50 just after the merger, but it seems that is a worst case scenario. It could very well mean $2 a share, rather than the $4 or higher that several analysts were forecasting before the collapse in the credit markets.
So for those that have been invested in Sirius XM, these prices offer an opportunity not often available to shareholders facing major dilution – you can actually buy at prices so discounted from the threat of bankruptcy that doubling the number of shares, thus protecting oneself from that dilution, is relatively inexpensive.
So yes, be aware that dilution will come once the preferred are converted sometime in the future – but if you want to protect yourself from that dilution, think seriously about doubling your holdings now, rather than later.
Malone didn’t invest in Sirius because he likes Mel, or felt a civic need to save satellite radio. He sees a financial opportunity. In a sea of other potential investment “opportunities” he chose to put money into Sirius XM.
Market cap is back over 600 million that is significant. Its still a 2011 play. If car sales improve and they can keep existing customers the stock could get back to $2.50-3.00 That is at least 2 years away. Remember at that time they can also raise prices and hopefully have a more robust advertising market. Expect Mel to advise on the conference call that he has bought more stock. Most important I would guess SIRI will be a fun to place to work for the next 2 years.
Malone has saved us shareholders for now. This deal is very dilutive, but certainly better than bankruptcy which would have basically wiped us out.
This country’s and the world’s other major economies are in a very severe recession due to the credit crisis. It will be a long time, before this stock can climb back above a dollar, IMO. SIRI is a 2013 or 2014 play rather than a short term bounce play to me.
Hey! It’s Tuesday, and the Common was NOT wiped out! Let’s all take a moment and reflect on some of lifes’ simple pleasures. If you’re reading this, you’re probably STILL in the game!
Yes, you’re right Saatradical! Now we can all breathe a lot easier and relax more.
Good thought Saatrad………Several days earlier no doubt, many of us were SUPER depressed if not outright Scared………..This was Good………….Period !
I’ll relax at least for today !!!
They can now start looking at ways to extend their market penetration (Internet, Ipods, etc.)
when refinancing with banks completed For May debt and sirius issues malone his shares, they will then have a reverse split to recapute dilusion…and then some
Wow, A deal was made and the stock price didn’t fall to $.001. This is the first time in a year that good new for the share holders didn’t go in the shitter. I knew Mel was up to something, he could not afford to go bk. He has to much money (and pride) invested in this company. Stay long (year or two) and all will be fine. “In Mel we trust” is my motto…
Might be time for me to schedule another victory parade, the same way I did on behalf of JC . . . here is another headline-grabbing DB who is clueless:
Argus Research Co. analyst Joseph Bonner said the terms give Liberty a foothold toward a possible takeover of Sirius, which has two more major debt payments this year and is still struggling to gain subscribers in the recession.
“Undoubtedly Sirius will continue to struggle,” he said.
No more clueless reporting DB. Consider this a courtesy stop. Next stop . . . you get a ticket and a big parade announcement.
In case anyone has questions for Joe Boner of Argus:
[email protected]
or you can just give him a call to pick his brain on FCC compliance issues:
Joe Boner, CFA, DB
(212) 425-7500 ext. 5464
What a ‘Boner’ Killer this Guy !!!