Barrington Research issued a report on Sirius XM Radio today that highlights the recent Liberty deal, as well as the upcoming report. The firm, in light of what has transpired sees down-side as lower than before, but in light of dilution, rates the company as market perform.


Downside Risk More Muted, but Upside Diluted; Reducing Rating
SIRI plans to release Q4/08 and full-year 2008 earnings results on March 17, 2009, with a conference call to be webcast at 7:00 a.m. CDT. Our EPS estimates are for a loss per share of $(0.06) for the quarter and $(0.23) for the year. Consensus estimates are $(0.07) and $(0.30) for the same periods, respectively.

We admittedly stayed too long with an overly optimistic investment rating on SIRI, based on our view in the later stages that management would be able to successfully refinance its debt maturities, an action that would then open the door to a potentially favorable market response to the generation of positive EBITDA following years of cash losses. The collapsing credit markets made the refinancing a challenge, bringing Sirius XM to the brink of bankruptcy. At that point, we felt the stock appeared to possess two potential contrary outcomes – a complete loss of value or substantial upside as attention shifted to profitability.

Enter John Malone. Liberty Media Corp. agreed to make an initial $530 million investment in Sirius XM that became part of a plan that effectively pushed off any impending maturities for at least a year. However, there are elements of good news and bad news for Sirius XM. On the plus side, Liberty’s agreement addressed the impending bankruptcy risk by providing $280 million of funds that took out the $172 million of maturing 2.5% convertible notes then due and owned by rival Charlie Ergen’s EchoStar/Dish. Another $250 million of loans in two stages by Liberty, plus a separate $250 million bank debt maturity extension addressed the immediate crisis. On the negative side, the second phase of the deal with Liberty involves issuance of 12.5 million of preferred stock, convertible into 40% of the SIRI common stock. Thus, bankruptcy risk is reduced, but the near-term upside appears greatly sacrificed to this dilutive element.

The Liberty loans command a rate of 15%, providing a significant near-term financial benefit to Liberty, but added costs for Sirius XM. In addition, the slowing rate of auto purchases will work against subscriber gains that have recently been very much OEM-driven. The bottom line is that while the risk of a worst-case situation has been averted, the upside is less robust and the stock valuation is significantly diluted. Therefore, a reduction to MARKET PERFORM rating is warranted.

Position: Long Sirius XM Radio