As Sirius XM gets ready for their annual meeting of shareholders, their biggest OEM partner, GM, could well be getting ready to file for bankruptcy. For the overall sentiment of the economy, the GM news is hardly good. Consumer confidence has been on a virtual see-saw, and a GM bankruptcy has wide reaching implications. The question for Sirius XM shareholders is what impact a GM bankruptcy will have.
Sirius XM has already absorbed the news that Chrysler’s woes will carry a dramatic impact on the Q2 numbers. With their bankruptcy, Chrysler halted production of vehicles, and by extension, satellite radio installations.
General Motors bondholders have rejected a debt for equity swap that would have staved off bankruptcy and facilitate an additional cash infusion into the company. The automaker has until Monday to complete government-ordered restructuring of debt, labor costs, and production plant closures. The UAW had agreed to take a 20% stake in the company, but it is the $27 billion in debt held by bondholders that is the stumbling block. Those bondholders were offered a 10% stake.
Sirius XM Radio recently announced that their deal with the automaker had been extended to 2020 with more favorable terms for Sirius XM. GM has already slowed production substantially, and announced the closure of 1,100 dealerships.
The GM deal with Sirius XM differs from the Chrysler deal. With Chrysler, subscribers are counted when payment for the trial period is received at production. This means the impact from Chrysler will be felt in Q2. With GM, the subscriptions are not counted until the car is sold. This means that the slow in production will impact SDARS in Q3. Ironically, Sirius XM could see a small boost in typical GM subscriber numbers because of steep discounts being offered to consumers to buy cars. Closing dealerships need to clear out inventory and are getting more aggressive with prices. This means a small boost in GM subs, but with slow auto sales, the effect may not be very tangible.
It is possible that the new GM deal could be erased, or even modified in bankruptcy, but that is unlikely in my opinion. Satellite radio provides revenue for GM. What is more troubling than the bankruptcy for Sirius XM investors is that the entire OEM channel is still seeing very poor car sales. stabilization in the OEM channel is what is needed to see satellite prosper. Current 2009 guidance of $350 million in adjusted EBITDA is based on an OEM channel run rate of 9 million car sales for the year with a 50% installation rate. With nearly 5 months in the books, that 9 million run rate is holding, and most analysts do not see it dropping below.
One thing is certain. The current condition of the OEM channel will be carrying an impact for a minimum of the next two quarters.
Position – Long Sirius XM Radio, No Position GM