Long time media sector analyst Jessica Reif Cohen of Merrill Lynch has issued a report on Sirius XM Radio. Her report notes that the company is seeking authorization from shareholders on additional authorized shares, as well as a reverse split.

Cohen notes that the reverse split is to ensure compliance with NASDAQ’s $1 listing requirement, but also noted, "...the share authorization is to provide financial flexibility to meet the $1.05bn of 2009 debt maturities as stated, '..., we may choose to issue shares of common stock in satisfaction thereof (debt maturities).' Given distressed trading levels of the debt and shares, incremental equity capital seems challenging. However, we can not rule out debt for equity swaps, with the incremental share authorization facilitating exchanges with convert holders (at what ratio unclear). Regardless, the risk for existing equity holders is dilution."

Cohen reiterated Underperform on SIRI citing:

  1. 2009 debt refinancing risk
  2. Risk of dilution to the equity.

Taking things a step further Cohen also stated that Merrill will be reassessing their current PO of $1.00 considering SIRI sales channels have come under increased pressure with:

  1. MLe forecast for U.S. auto sales lowered to 12.5mn SAR from 14mn SAR (SIRI guidance on 09/09/08 was based on14mn SAR
  2. Deteriorating outlook for U.S. discretionary retail spending
    Lastly the analyst states, "However, we think it is worth reiterating that if Sirius is successful in refinancing its 2009 maturities, the risk profile of the company would fall significantly."

The average price target by analysts continues to be very low, and while investors are expressing frustration, there are not many positive aspects in nearly any equity in the market. The next likely step for Merrill and others will come when the company issues their third quarter results. Should Sirius have a positive result in their financing, the big overhang on opinion would be removed, leaving room for not only more positive opinions, but more positive outlooks as well.

Position - Long SIRI