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.