Reverse Split???
It seems that satellite radio can not let a day pass without speculation or someone reading more into a statement than is really there. Today on CNBC, Mel Karmazin spoke with David Faber in a brief interview that discussed in general terms the closing of the merger, and where the company is headed.
Mel stated many things that people seem to have overlooked because at the end of the interview, Faber inquired as to whether the company would conduct a reverse split. Mel’s statement that the cash flow of the company is how it is run fell on deaf ears. The fact that $2.2 billion in revenues have been generated over the past 12 months, or that aside from a satellite launch in 2009 the company would be in positive territory in 2009 might as well have been stated in a foreign language, because all everyone wants to talk about is a reverse split. Even Motley Fool wrote about it with a headline that was sure to pique some curiosity.
The reason some seem to want a reverse split is so that they can get the stock price to what they feel is a more respectable level. The function of the split does nothing more than bring down the amount of shares by way of increasing the value of those share. If an equity trading at $1.60 were to do a 4 to 1 reverse split, the number of outstanding shares would be divided by 4, and the price multiplied by 4. In theory the event is neutral, but perception also matters. Most reverse splits are not seen as a good thing. It is a move that companies sometimes use as a last resort to make their shares more attractive.
If, and that is a big if, Sirius XM Radio were to consider such a move, now would be about the best time to do it. Some argue that certain institutional buyers and funds can not buy stocks below $5.00. Obviously, in it’s current situation, Sirius XM is below that price. If this were a major concern, then there could be some benefit to using a reverse split to facilitate allowing those institutions to invest. However, if the buying pressure does not exist now, then what makes anyone think that simply getting the price above $5.00 would add an influx of buyers that would be material enough to make the process worth while? From a market cap perspective the reverse split accomplishes nothing.
Mel, when asked if he would entertain the idea of a reverse split gave the only answer he could. “We are considering all options,” and somehow, that statement became the topic du jour. Personally I care less about the reverse split than I do the $400 million in synergies, the $2.2 billion in revenue, the converts due in 2009, the cash flow, the fact that Sirius XM is the second largest revenue generating media company, and the fact that metrics will scale better with the merger.
Talk about reverse splits all you want, but it will get you nowhere fast. Investors should look at the metrics, the guidance, and what the potential of SDARS is rather than worrying about a comment on a stock split that does not change the market cap.
Position: Long Sirius XM.
Tyler, great article and I agree with looking at the metrics for future results. I also think that the next to quarters are critical to boost investor confidence. I am a firm believer in “Growing The Size of the Pie” and not having a reverse split, they show desperate thinking. And perception, whether our ideal minds like it or not, Is Reality in the investment community.
Unfortunately I also agree with Tull that folks buying on the margin are hoping for some relief from the below 2.00 stock price and the calls that will be coming due or are already. It would be unfortunate if long term investors, in sticking it out through the merger, were force to sell their shares to meet their calls.
Healthy companies buy back stock, and pay down or off debt as cash builds to increase investor equity, which raises the stock price and investor confidence. Another way to increase the “size of the pie”, (Bruce I hope you don’t mind me using your analogy). Given the tremendous dilution of Sirius Xm Radio shares already, Mel needs to build confidence in management’s ability to the execute the operating plan as stated. Any further weakening of investor perception with a reverse spit will be devastating to the company and stock price. Mel being Mel, will not do a reverse stock split after already giving common share stockholders a “Black Eye” for the team.
Really bad post Tyler. I don’t think a reverse split has ever or will ever be considered. I don’t understand why you even addressed it.
Muscle13 – the reason Tyler addressed it is because everybody and their brother won’t stop talking about it.
Tyler – I couldn’t disagree more with your assessment that “if Sirius XM Radio were to consider such a move, now would be about the best time to do it.” Now would be the WORST time to do it. This stock is up against Big Mo – as in big bad momentum. A reverse split will simply set it up to get shorted again…at least in the short term…Plus you got the LIAMS of the world demanding Mel and co. spill all the money-making beans all at once. LIAM, you obviously don’t realize that any good news that Mel reveals this instant will only have partial impact because of the rut this stock’s in. Give it a few weeks. The stock stabilizes, then every nugget of good news gives us a mini-pop and even frivolous buyout rumors start getting treated with some respect
liam
don’t sell yet or you definitely lose everything.
I’m down about 30 grand on this stock but I am not worried a bit about it.
Just listen to mel, read the annual reports, look at where satrad is going.
Mel sid they will be profitable in 2009 – obviously he’s biased, but if thats true, this stock is going to take off.
hang in there – at one time it was above 60$ a share.
I believe it will get back to that eventually.
From what I understand, the share price right now is low because they had to raise capital to cover XM debts.
Once all the shizzle settles – this company is a HUGE force and I really believe it will be very profitable.
if you are a subscriber you have to know that it’s the best thing that ever happened to radio and theres very little chance it will fail. Look at Mel’s track record, everything he touches turns into piles of money.