Jonathan Jacoby of Bank of America published a note today relating to Sirius' funding. In his opinion, the funding provides a cushion, but he feels that XM is in a stronger position if the merger fails. Check out an excerpt of Jacoby's report after the jump...
Rating: Neutral, Price: $2.84, 12-Month Target: $2.75, Market Cap.: $4,314.0 MM
Raises $250M, But Still in Weaker Position if Merger Isn't Approved
Sirius has borrowed $250M under a senior secured term loan. The term facility matures in 5.5 years and has covenants similar to the 9 5/8th notes due 2013. However, we are hearing chatter that the pricing is Libor + 250 (or about 7.9%).
Is Sirius fully funded? The risk is that it isn't. More financing might be needed if the merger doesn't go through. Our model estimated that Sirius' cash balance would dip to a low of ~$80M before the company achieved consistent positive free cash flow in late 2008 (before today's announcement), our belief is that Sirius' internal model suggests that the rate of cash burn will be even higher than we believe. We also note that Sirius has to repay ~$300M of debt in '09. SIRI can access another $100M in vendor financing from Loral (with some restrictions) but the restrictions make it unlikely to be used to repay the 2009 bonds. Additionally, SIRI has an outstanding lawsuit from a former distributor and a ~$27M in inventory receivable from Directed Electronics (their distributor).
We believe that the XM/Sirius merger discussions contemplated today's financing. Sirius is required to obtain XM's permission to raise additional capital, but it seems they had pre-approval for a certain amount of incremental debt (which probably includes the Loral financing as well).
The question investors may have is why XM management didn't demand better economics (i.e., higher than 50% ownership) in the merger agreement, as XM seems to have been in a better liquidity position. We note that XM has $400M in revolvers that they can tap.
Maintain neutral rating on SIRI - we believe that XM is better positioned if the deal doesn't pass the regulatory tests. XM's recent OEM deals essentially ensure that XM's OEM gross add share will be ~60% per year over the next several years. We estimate that the OEM channel will account for ~60% of the industry's new subscribers in '07 and an average of ~70% of new subscribers from '08-'10. Sirius has been more aggressive in the retail channel (we noticed that advertising has picked up of late), but we believe that XM's OEM advantage will leave it the larger company if the merger doesn't occur. We estimate that SIRI would be worth ~$3.50 if the merger is approved. Our price target of $2.75 assumes a 40% probability of the proposed merger receiving the necessary regulatory approvals.
Tyler Savery Position - Long Sirius, Long XM