Sirius is trading below its book value

[Brandon Matthews]

This recently released combined balnce sheet of the merged company has glided under the radar. It is quite an eye-opener.


http://www.sec.gov/Archives/edgar/da...279exv99w1.htm

[zcurzan]

Where the sell pressure coming from? And when do you see it reversing?

[Brandon Matthews]

Quote:

Where the sell pressure coming from? And when do you see it reversing?

That what is so crazy about this. If satellite radio ended tomorrow, investors in its common stock would get more than the current share price. In a growing company with so much going for it, this is utterly ridiculous.

Ironically there is more risk in not owning or shorting the stock than owning it outright. Reversing? Who knows? None of this makes sense!

[john]

Brandon Matthews, I agree that it is under valued. I think homer also showed this several days ago. He said something about it being the first time ever it was actually under valued. I know trying to put a price tag on what the spectrum is worth is hard, but I think that alone makes it under valued. Of course the spectrum alone is not worth that much without the infrastructure and subscribers to go with it. What is your opinion on that.

[deewcom]

Is it for sale? Who are potential buyers for XM's FCC license?

[James]

I thoroughly enjoy your articles and am also bullish on Sirius as a long term investment.

But.....

The consolidated balance sheet is smoke and mirrors with a large asset entry of pro forma adjustments made up largely of Goodwill (which is intangible) for the value of XM. The Goodwill figure was arrived at by taking the cost of buying XM based on the Sirius share price and subtracting the tangible assets Sirius received in the purchase.

Quote from SEC filing:
The pro forma combined balance sheet has been adjusted to reflect the preliminary allocation of the purchase price to identifiable net assets acquired and the excess purchase price to goodwill. The purchase price allocation included within these unaudited pro forma condensed combined financial statements is based upon a purchase price of approximately $5.7 billion

While Goodwill is a GAAP (Generally Accepted Accounting Principles) acceptable asset, it is often abused. Furthermore GAAP book value cannot be determined using pro forma numbers The (GAAP) book value for Sirius and XM was negative. It will likely be negative after GAAP Goodwill is added. We will find out after 10/31.

[Brandon Matthews]

The “goodwill” you are referring to is the difference between what was paid for the asset (XM) versus its value. Think of it as home equity.

Basically, if Sirius was to turn around and sell xm, the value to a would be buyer is 11.5 billion dollars. That makes it an asset.

As for intangibles, this includes items such as patents. There are two primary forms of intangibles - legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how, knowledge), collaboration activities, leverage activities, and structural activities). Legal intangibles generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price.

All of this is standard accounting practices and does not change the fact that Sirius XM has a book value of 1.60 and is trading at 1.49.

Problems with goodwill writedowns occur when a company overpays for another company. In this case, Sirius under-paid due to market conditions and the price of the stock.

As for your claim that the goodwill figure is skewed somehow, I challenge you on that. Large corporations are subject to external auditing and as such are not so likely to skew data. Private and small companies have been the ones that fail to follow the rules.

[Brandon Matthews]

John:

I have not looked into it myself but I did just see homer posting about it on a message board. He put the value at 4-5 billion. My gut reaction is that Homer tends to speak from knowledge rather than speculation on such things.

[James]

Brandon,

There are a couple of issues. The first is the balance sheet is pro forma and not GAAP. To get a true book value we will need to see the third quarter results that will provide us with the GAAP goodwill number.

Goodwill is a good tool to represent the value of a company purchased beyond it tangible value. XM definitely has some intangible value but I don't believe the additional Goodwill on the balance sheet accurately represents the value added to the company today. The value of the merger is the future cost savings which is not represented in the balance sheet.

Tyco was a good example of Goodwill being abused. While basically a good company, the goodwill was used to inflate the book value of the company beyond the gains achieved by it's acquisitions. Jarden's book value is an absolute joke. Jarden has a $21 book value and a negative tangible book value.

As I said, I am positive on the future of Sirius XM.

[Brandon Matthews]

I look at it like this. When have you ever heard Mel exaggerate anything? His MO is ALWAYS underpromise. He will not overstate goodwill for the simple fact that as a large corporation, their books are subject to outside accounting verification.

As for problems with goodwill accounting, most of anything you will find is pretty much ancient...preceding 2006 when the new rules took effect. AOL / Time Warner is an example. In an inflated market, it is easy to overvalue a company's assets. In our current economic environment, it is damn near impossible.

I would not worry about it being skewed to the upside. For arguments sake, let's say certain things like XM's real estate were overvalued. ( I happen to know Sirius will be leasing unused space in that building) There is no further downside potential remaining in DC real estate. That is why its not reasonable to assume assets were not valued appropriately.

Before 2006 I would agree with you. The days of overvalued goodwill on the part of large corporations ended at that time. The TYCO situation you cite is from before 2006. It is for reasons such as TYCO that the game changed.

Here's an interesting read.

http://www.fulcruminquiry.com/Goodwill_Valuations.htm