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Thread: Sirius is trading below its book value

  1. #11
    homer985 is offline
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    As I noted on Yahoo earlier tonight... the $5.7 billion in Goodwill on the balance sheet is the purchase price that Sirius paid for XM. They will be amortizing this $5.7 billion to the earnings statement over the next 40 years... approximately $35 million per quarter, if my math is correct.

    FWIW, no you wouldn't include the Goodwill in the theoretical Book Value -- in a liquidation of assets... however, if the company were to be sold again, via a private sale or merger -- it WOULD be included. So yes, in a liquidation situation... the book value would be negative. However, in a sale situation... the Goodwill would still be included, therefore the $1.59 per share Book Value is still relevant (stockholders equity / shares outstanding... 4,714,068,000 / 2,971,234,786 = $1.586).

    Furthermore, it is my opinion that a combined value of $1.3 billion for the S-Band licenses that XM and Sirius have is still massively undervalued. Prior to the merger the combined value was $225 million; now the Pro Forma value is just under $1.4 billion. Spectrum auctions today for 25MHz of bandwidth would go for significantly more. If this company were liquidated today -- this bandwidth will go for significantly more than $1.4 billion.


    So it comes down to the "intangible book value" versus the "tangible book value"... if the company were sold tomorow, then I believe that there would still be some intagible value -- based on the Goodwill -- that would enter into the value of the company... taking it higher than the current "intangible book value". However, if it were liquidated tomorrow -- then it would be a negative number, based on current figures... however, as I further noted... I do not believe that the correct valuation of the spectrum/license has been placed. It would likely be valued higher... so the "tangible book value" (which is currently negative) would likely be higher too. How much? Depends on what the spectrum would end up going for... a lot higher than $1.4 billion, IMHO.


    Yes, I have been pointing out that Sirius is trading under its book value ever since the merger closed. I was surprised by this, but never made a big deal over it because much of it was due to the Goodwill being amortized in the financials. Bears have a good arguement that it is only that high because of the Goodwill -- but Bulls can point out that in a sale, Goodwill would still be included, as well as point out that the FCC licenses are still way undervalued. I chose just to leave it alone... rather than trying to argue the Bull side. Most wouldn't understand it, let alone believe it.



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    Last edited by homer985; 08-17-2008 at 02:24 AM.

  2. #12
    homer985 is offline
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    Quote Originally Posted by Brandon Matthews View Post
    Several weeks ago I wrote that it would be better for Sirius to buy XM at the lowest price possible, because for accounting purposes it would be logged into the books as an asset and the low cost would be reflected.

    Fortunately for investors, this did in fact happen. It just so happens that Sirius bought XMSR for a cost of 5.7 billion dollars. As it turns out, those assets have a current market value of 11.5 billion dollars.
    Brandon, this is not what happened. The purchase price for Sirius was based on the price of Sirius at the time the merger was announced. More specifically, the two days prior to and the two days after the announcement of the merger. This average price was $3.79.

    They then multiplied that amount by the total number of shares issued in the merger (based on the 4.6 ratio), which was 1,436,709,642. This came to $5.445 billion. Then then came to a fair value for XM's remaining outstanding stock options, restricted stock and warrants... which was $221 million. Added together is how Sirius arrived at the purchase price of XM, for $5.7 billion. It has nothing to do with the closing price at the time of the merger or any NET figure. It was always based on the average closing price at the time the merger was announced.

    "This amount was derived from the estimated number of shares of our common stock to be issued of approximately 1.5 billion, based on the outstanding shares of XM common stock, preferred stock and restricted stock on June 30, 2008 and the exchange ratio of 4.6 per each XM share, at a price of $3.79 per share, the average closing price of our shares of common stock for the two days prior to, including and two days subsequent to the public announcement of the merger."

    "The purchase price also includes the estimated fair value of warrants, restricted stock and stock options issued as of the closing date of the merger in exchange for similar securities of XM. XM options, restricted stock and warrants were exchanged for stock options, restricted stock and warrants in us and the price per share was adjusted for the 4.6 exchange ratio... Accordingly, the purchase price included an estimated fair value of stock options, restricted stock and warrants of approximately $221 million."


    http://yahoo.brand.edgar-online.com/...cik%253d908937


    The $5.7 billion pricetag will be amortized to Sirius' earnings over the next 40 years as Goodwill.

    In the event of a liquidation, this amount would be lost. But in the event of a sale or merger -- it would be kept in as an asset.


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    Last edited by homer985; 08-17-2008 at 01:40 AM.

  3. #13
    homer985 is offline
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    A slight correction...

    The purchase price was $5.7 billion roughly (5,682,631 to be exact), but this is not what is being amortized as Goodwill.

    The Goodwill amount is the difference between the purchase price I noted above -- and what Sirius valued their NET purchase at... which actually comes to ($115,775,000). In otherwords, Sirius valued their NET purchase at a negative $115.7 million. And since they paid $5.68 billion for it... combined is the amount that was put in as Goodwill, which comes to $5.79 billion. This is the amount that will be charged to the shareholders... the purchase price, plus the loss on the purchase.

    It is the amount that will be amortized to the earnings statement over the next 40 years.


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    Broken down, this is how they came to the figures...

    (1,144,272) - XM historical net book value of assets and liabilities assumed
    (60,200) - XM minority interest assumed
    (141,412) - Elimination of XM historical FCC license
    1,300,000 - Adjustment to fair value FCC license
    (2,750) - Elimination of XM historical intangible asset related to subscriber and advertiser relationships and trademarks
    437,000 - Adjustment to fair value intangible assets related to subscriber and advertiser relationships and trademarks
    (463,435) - Adjustment to deferred taxes related to increased FCC license carrying value
    (65,000) - Estimated transaction costs
    (16,057) - Loss on commitment to purchase transponders of XM-4 satellite
    (21,093) - Write-off of debt issuance costs
    61,444 - Unrecognized compensation on unvested stock options and restricted stock
    Total NET Value... ($115,775)
    Total consideration paid out... $5,682,631

    Residual goodwill created from the merger - 5,798,406


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  4. #14
    Mario is offline
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    A few things.

    1. Goodwill is no longer amortized under U.S. GAAP. Companies can no longer deduct the value of goodwill annually over 40 years like before. This has been changed.

    2. Homer said " FWIW, no you wouldn't include the Goodwill in the theoretical Book Value -- in a liquidation of assets... however, if the company were to be sold again, via a private sale or merger -- it WOULD be included. So yes, in a liquidation situation... the book value would be negative. However, in a sale situation... the Goodwill would still be included, therefore the $1.59 per share Book Value is still relevant"

    -


    This is ambiguous and not entirely correct. While technically, if the goodwill is on the books at the time of a potential buyout, it would be transfered to the books of the buying company (unless it was impaired or written down), it does not actually mean that a buying company would actually pay for this goodwill.

    For example, just to make things as simple as possible, imagine that you had the chance to buy, a la carte, anything on the balance sheet. Obviously you would not buy a liability in most cases, unless you needed a tax loss for tax purposes.

    So you would generally stick to buying the assets parts. Every item listed as part of the assets has a value, technically speaking. Fixed assets - Value, Receivables, Inventory, etc... all have value that somebody would be willing to buy. Even the intangibles have a value that somebody would buy.

    But, for practical purposes, what value could somebody get from 'buying' the goodwill? If Sirius came to you today and offered you the goodwill, how much would you pay for it? Just the goodwill... Logically, you would not buy the goodwill because it would have no value. It is simply a line item used for consolidation purposes and record keeping, and tax purposes.

    So how much would you buy the goodwill for and why?

  5. #15
    homer985 is offline
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    Quote Originally Posted by homer985 View Post
    Furthermore, it is my opinion that a combined value of $1.3 billion for the S-Band licenses that XM and Sirius have is still massively undervalued. Prior to the merger the combined value was $225 million; now the Pro Forma value is just under $1.4 billion. Spectrum auctions today for 25MHz of bandwidth would go for significantly more. If this company were liquidated today -- this bandwidth will go for significantly more than $1.4 billion.

    So it comes down to the "intangible book value" versus the "tangible book value"... if the company were sold tomorow, then I believe that there would still be some intagible value -- based on the Goodwill -- that would enter into the value of the company... taking it higher than the current "intangible book value". However, if it were liquidated tomorrow -- then it would be a negative number, based on current figures... however, as I further noted... I do not believe that the correct valuation of the spectrum/license has been placed. It would likely be valued higher... so the "tangible book value" (which is currently negative) would likely be higher too. How much? Depends on what the spectrum would end up going for... a lot higher than $1.4 billion, IMHO.

    After studying the Pro Forma filing a little more, I previously thought that they adjusted the total value of the spectrum from the previous $225 million to the Pro Forma adjusted $1.38 billion... however, I see now that that is slightly wrong.

    They in fact, only adjusted the value of XM's portion of the bandwidth from $141 million to $1.3 billion. However they have left Sirius' portion of the spectrum valued at just $83.6 million.

    I found it very difficult to believe that Sirius spectrum is only valued at $83.6 million, while XM's portion is valued at $1.3 billion.

    Theoretically, both should have the same value... in which case, would put this combined asset value at $2.6 billion. Which is much closer to what I think it is actually worth -- but I still believe that that amount is conservative.

    This adjustment, BTW, would put the "tangible book value" back on the positive side.



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  6. #16
    homer985 is offline
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    Quote Originally Posted by Mario View Post
    So how much would you buy the goodwill for and why?
    I was speaking theoretically -- your post sounds more like a liquidation. Barring a total disaster, it would be doubtful that Sirius would be willing to sell itself any time soon without consideration for what they paid for XM... which was kinda my point.

    As for GAAP accounting, I'm not an accountant... the last I remember they did amortize Goodwill. I did look it up and see now that they don't... which is actually good news. Though I see there may still be the occasional impairment charges... but I'll leave that up to the accountants.


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  7. #17
    deewcom is offline
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    XMSR Debt Problem

    Homer, how would you explain or account for the high share price maintained by XMSR all those month's pre-merger? Some discussion on SIRI Yahoo Message Board suggested that SIRI was the better stock to own (in the event of merger approval) because XMSR had all that debt. There were (are) many things said at the Yahoo Board and it is often difficult to discern good information from faulty information. That bit that I recall about XM and its debt obligations seems to ring true right now. Is it possible that so many investors were blind to it? How did XMSR keep its share price healthy despite the debt problem? It seems that the XM debt was more problematic than SIRI debt, but SIRI SP is the one that took the hardest beatings.

    Of course, this does not discount or preclude the likelihood that any accounting methods used (allocation of asset values and appropriation of debt vis a vis SIRI and XM) were chosen because they would be most beneficial to Mr. Karmazin and his current board.

  8. #18
    winagain35 is offline
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    Dee,
    Remember XM's float was only 330 Million shares compared to SIRI's float of 1.5 Billion. Remember the Arb? Technically XMSR traded LOWER than SIRI when you accounted for the 4.6 multiple.

  9. #19
    homer985 is offline
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    deewcom... you have to remember what went on in the early days...

    Back at the end of 2002, XM had $413 million worth of LT debt while Sirius had $569 million -- with both reach a crisis stage of cashflow versus liquidity and debt due. XM (with the help of GM and Honda and a good negotiation) refinanced it and gave them some liquidity. At the end of the day, their LT debt increased to $568 million. Meanwhile, Sirius did the opposite. They got the Bond holders to take equity for their debt... leaving them with just $58 million worth of LT debt, however the shareholders were diluted to just a fraction of what they once held (prior to this refinancing there were 77 million Sirius shares outstanding, afterwords there were 911 million outstanding.

    Since then, XM's debt slowly built up to the $1.83 billion level over the next 5 years (they added about $1.27 billion in mew debt over that time); Sirius meanwhile slowly built up their debt too over these years from $58 million to $1.28 billion (they added over $1.2 billion in new debt over that time).

    At the end of the day, the amount of debt was still fairly similiar. At the end of the most recent quarter XM had $1.83 billion in total debt related items; while Sirius had $1.28 billion. However, it must also be noted that although XM has $550 million more debt -- that amount is about what XM had to pay for their satellite replacement program. A program that Sirius is just starting now.

    I tend to challenge people that question XM's debt... XM raised $1.83 billion over the years; while Sirius raised $569 million, then wiped out their shareholders, then raised an additional $1.2 billion in new debt. So they're about equal -- however, Sirius still needs to fund their satellite replacements... which will be at least another $600-700 million more over the next 4 years.

    Problematic? Depends. Are you referring to what's due in 2009? If so, as was discussed in the other thread -- approximately $350 million is expiring and can be extended. They also have a convertible that will convert -- then have the $400 million coming due in December. I don't see this as any different than the $300 million Sirius has maturing in February.

    Problematic, as in interest expense? Sure, there's no doubt that XM pays more interest -- they have more debt. But again, that is because XM didn't dilute their shareholders like Sirius did.

    If you ask me -- both set out on a cross-country road trip, with both going their own direction... however, they both reached the destination at the same time. It wasn't a race and both got to where they needed to go -- they just went about it differently. One did it in a more shareholder friendly way -- the other did it in a way that wouldn't be hard on the income statement further down line.

    Fear what you read on Yahoo.


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