As a good investor, one has to look at the positives as well as the negatives of any given company that they are interested in investing in. As most of you probably know, I am bullish on SIRI and I do think the long term future is bright and that the merger will only speed up the road to success for these two companies. I am, however, able to see a few issues that will have to be dealt with by the combined company debt, institutional holdings, CapEx, naked short selling, retail sales.
1) Debt: The combined company now has a total of 3.4 billion dollars in debt. This does not concern me nearly as much as the fact that 1.1 billion of that is due next year. Mel has come out and said that they expect $400 Million in expected synergies, and $300 million in free cash flow, but that is before capital expenditures. Even so, $300 million does not come close to paying off that $1.1 billion. That leaves at least another $800 million dollars that will need to be refinanced. What are the credit markets going to be like next year? Will the $300 million in FCF prove the value of SIRIUS XM Radio and allow them to get acceptable terms? We will have to wait and see.
2) Institutional Holdings: Many people cannot figure out for the life of them why the stock keeps dropping. All of these synergies and the PPS is still going down? One item that I have been cautioning people about for a VERY long time (but no one seems to acknowledge) is the fact that institutions are limited on the number of shares that they can purchase OR hold. I am not simply talking about not being able to buy a stock under $5 or $3 or what ever number.
Look at it this way: A fund holds %5 of SIRI and %5 of XM. Now that the merger is completed, they still hold %5 of the overall company. BUT, in their portfolio, the combined stock may now equal to 10% of their holdings. Most funds have very strict rules about what percentage of a fund a single company can take up. If you look at the institutional investors list of both individual companies, you will see a lot of repeat names. As these institutions sell to bring their holdings back within rules, there could be downward pressure.
3) CapEx: Also known as Capital Expenditures, refers to the cost of infrastructure, or most notably, the Satellites. Borrowing some numbers from a poster on the Sirius Buzz Forums, Homer, this is what the CapEx looks like from Sirius's standpoint:
Sirius FM-5: (Satellite and Launch) Sirius FM-6: (Satellite ONLY)
All of 2008: $100 million All of 2008: $100 million
Q1 2009: $25 million All of 2009: $100 million
Through Q3 2010: $80 million
Homer warns us that these numbers are very rough estimates, and does not include launch insurance for either satellite, which is estimated to be around $40 million dollars per satellite, or the cost of the launch for FM-6, which sits around the $90-$95 million mark. Adding up those numbers, you are looking at $405 million dollars, plus insurance ($40 million x2) plus launch fees for FM-6 ($95 million) which brings us to a grand total of $580 million over the next 2 and a half years. The positive for this is that if they build in the ability for one sat to broadcast both networks, this will hopefully be the last time they will have to launch satellites for the next few years.
4) Naked Short Selling: For the 6th straight week, Sirius has shown up on the RegSho list. For those of you that are not familiar with RegSho, it is basically a list that the SEC keeps to show which stocks have a large percentage of stock that fails to deliver. Throughout this merger process, Sirius has been on and off of the RegSho list too many times to count, but to my horrible memory, I cannot remember the last time it was there for 6 weeks STRAIGHT. Apparently, the SEC is busy dealing with the bank scandals, which leaves the naked shorts to come and rampage over Sirius.
5) Retail sales: Retail has died after the initial Howard Stern pump. Why? It is because Satellite Radio has always been an in-car form of entertainment. Using a portable or even desktop device has always been very hit-or-miss (Although the guys over at TSS Radio (a SiriusBuzz.com sponsor) are awesome when it comes to helping you solving these problems). The most obvious thing I can think of to help drive the demand on these things is to install a Wi-Fi option in all new receivers. They started this with the Stiletto for Sirius, but I was not able to find an XM portable that had Wi-Fi capabilities (at least not on the most popular portables, the Inno, Helix, and the Xpress lines, though I may be wrong). Get those a-la-carte and interoperable radios out to the market and make sure they have Wi-Fi capabilities. This will increase penetration into the home market, a market that is sorely missed today.
As I said in the beginning, I am a SIRIUS XM shareholder and I do believe this company has some significant long term growth ahead, but it is important for investors to know the good AND bad about the company that are looking to invest in. I feel that in the next 3-5 years, this company is going to be very successful, but that does not mean that I do not see (or that you should ignore) the near term roadblocks.
Disclosure: Long SIRIUS XM