Retired Converts

Behind the retiring of 10% of of these February convertibles there is a story. We won't be sure what the whole story is until it plays out, but there is a story nonetheless.

Why would you retire 10% of the offering at this point in time? I see three possibilities:

1) They've renegotiated with the existing note holders, but there were some holdouts. This takes care of the rest.

2) The company sees itself as being only $30 million short of having enough cash on hand in February to retire the notes.

3) The've completed a new debt offering but were short in placing $30 million of it. This cleans it up.

It's interesting that the price on the new shares is .45 and the stock is still at .38. The noteholders could go into the market now and buy stock less for what they are getting these shares for. What does that tell you?

The timing is also interesting. Why do this 10% deal now? Either the company thinks the stock will go lower, so they are doing this now, or Mel wants to have the February issue resolved before the Q3 conference call. I have to believe it's the latter.

If anyone else sees any other possibilities, please post them here.

Quote:

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Originally Posted by Jay Wilson

It's interesting that the price on the new shares is .45 and the stock is still at .38. The noteholders could go into the market now and buy stock less for what they are getting these shares for. What does that tell you?

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They would never be able to accumulate that many shares in the open market in a short period of time without driving the price way up...

I agree that they would not be able to buy that quantity of shares in the open market in a short period of time. Then, the question is "Why would they want to buy a large quantity of shares in a SHORT period of time? Do they know (or suspect) something we don't know?

Usually if a company sells stock in a private transaction to an institution, it is below the market price, not above. Somebody close to the story is optimistic and wants more stock than they can buy in the market. They may be buying even more shares in the market as well.

If you were an institution or individual with a few billion dollars, how easy would it be to accumulate this stock, build a big position, then call up Mel and refinance all the debt coming up next year. You would pretty much be assured at least 5X your money within a year. Most likely, it would be in the 8-10X range.

It is still possible to make a killing in this country without being a dick about it!

Would that be insider trading or not? I don't think it is, because additional investment in a company is allowed as far as I know. I guess if they loaded up and then approached Mel with a financing offer, it would be ok too...

Your right though, whoever was going to give Mel the financing would be wise to load up on the stock first. Maybe that is what is going on now? Maybe whoever the bondholder was that got paid off in stock was hoping that the stock would tank more on the news so that they could load up with more shares before the financing deal is announced? Maybe this was part of Mel's financing deal?

If a group bought 10% of the company for 100 million, then helped finance 300 million, the stock would be back around 2 bucks.

They'd make 600 million dollars on the stock appreciation. Then they could sell a part of their stake if they wanted and be free and clear.

The stock is where it is because someone with the converts due in February wants it here. They want to force Mel to make a bad deal. He just needs a white knight. Or better yet, a black talk show host. Where's Oprah???

Oprah is super rich! Couldn't Oprah just buy the whole company?

Something is really weird about retiring such a small amount of the debt with stock at this particular time with the share price so low. Why now? Why not after the Q3 earnings report? Why not after the market rebounds a bit? They had until FEB '09, right? Why not after Q4 earnings? The stock should be much higher then, right? I don't get it.....

I hope Homer doesn't' mind me posting this. He had an interesting theory on the yahoo board. Seems like the most plausible explanation I've heard.
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The fact is, Sirius could not force early conversion of these Notes, nor could they force the holder to take shares instead of cash. This had to have been done at the holders option... but why?

The holder could have held all the way until maturity in February, and then forced a cash settlement - but instead elected to take the shares. If the holder was going to take the conversion and thent turn and dump the shares now on the market, then that would just be stupid -- as their conversion amount is down 20% already. Why would they do that? The fact is, they wouldn't. Especially when they could have just held on to the Notes until maturity and FORCED cash settlement. The only plausible (non-bullish/non-pumping) reason is that they had a short position and needed a conversion to settle up.

So why should Sirius help out? Good question -- but unfortunately I must give an opinion that is based on a couple assumptions...

First, understand that most convertible bond issues are shorted against by the bond holder at the time they buy the debt. These positions are taken by hedge funds and brokerages/investment houses.

Second, if the stock is above the conversion price at maturity - you close the short position with the newly converted shares; if the stock is below the conversion price at maturity - you take the cas settlement and buy stock on the market to settle up the short position.

Third, not all short positions that were hedged positions against the convertibles were taken by hedge funds and the like. Sometimes the positions are taken by the banks doing the debt placement, just as a hedge. Why would Sirius want to screw the bank that helped place the debt?

Think of this possibility... suppose the $30 million conversion yesterday was done for Morgan Stanley... what if Sirius reached a financing deal with Morgan Stanley to refinance the February 2009 converts -- but MS went back to Sirius to tell them that they were short $30 million of their 2009 converts and didn't want to have to buy the shares back on the open market. So Sirius makes this pre-arranged deal to settle up the MS short positition -- and in return, MS refinances the maturing 2009 Notes.

I'm not saying that this is the deal -- but it is certainly plausible. Not all short positions are "negative" and Karmazin isn't out to kill every short. Because some of them are likely allies to Sirius, who only took the short position to hedge against the debt that they bought FROM Sirius in the first place.

We'll have to wait and see what happens...
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Thanks for posting that. I wish Homer would have posted that here first. Does the yahoo board deserve his analysis before us?

I think that his theory is highly plausible and I have always suspected that the retire of such a small amount of converts was tied to a bigger deal. Why hasn't it been anounced yet? I don't know if today's market invironment is the best time to capitalize on an announcement of that magnitude. Mel would want to time the announcement just right and maybe the financier wanted some more time to accummulate more shares first as part of the deal...

Who knows?

The 2 1/2% Feb 09 converts were issued in February and March of 2004. At the time, SIRI was trading between 2.70 and 3.00. So when the note holders created their short hedge - 67m shares would have grossed between $180m and $200m. Someone made a lot of money if they indeed covered here.

Retiring those converts with those .45 shares seems like a good deal now that the stock just hit a new low of .25 today....