Sirius XM Bankruptcy May Be Good For Shareholders
When might chapter 11 be good for holders of common stock? Quite possibly when it involves Sirius XM Radio. I'll be honest, the reports of a potential bankruptcy filing had left me feeling baffled to say the least. It wasn't until I listened to Tyler's Take on SiriusBuzz radio and had an online meeting with Newman, this article's co-author, that revelations began to unfold in front of us. Newman had made the suggestion that perhaps the recently leaked bankruptcy filing by Sirius XM involved only XM Satellite Holdings, rather than the parent company of Sirius XM. A simple Google search on the topic revealed hundreds of such cases. As a team, we decided to investigate the possibility a bit further and a hypothesis began to develop.
In this filing with the SEC, the corporate structure of the newly formed Sirius XM makes clear that the debt of XM was to remain the responsibility of the subsidiary corporation of XM Satellite Holdings Inc. (page s-9)
"What if," we asked ourselves, Sirius XM now has the technology to broadcast both services over the Sirius network alone. This patent, issued in April 2008 demonstrates that the company has the technology to broadcast dual services. Although the patent addresses commercial vs. non-commercial, the technology could easily be adapted to broadcast separate services over different bandwidths, a technology similar to HD radio technology. This could explain Sirius XM's recent channel consolidations as well.
According to Todd Mitchell of Kaufman Brothers, Ergen may simply be after XM’s satellites. XM currently has 4 satellites in the air, along with a spare on the ground. With an average price of about 500-750 million each, XM could potentially bring in 2.5 billion dollars.
As we considered the potential further, several other questions began to arise. We considered which company held which licenses. The FCC's approval of the merger granted the transfer of Xm's license to Sirius XM Radio.
We considered the contracts held by XM with GM, Honda and MLB. Mel Karmazin had stated that he had held talks with all of XM's partners, many of whom now sit on the merged company's board of directors. Under Chapter 11, these contracts could potentially be reworked to be more cost friendly to Sirius XM. It would also be in GM’s and Honda’s best interests to do their negotiating with the current board of directors who have both of their interests in mind (after all, they are ON that board of directors) rather than a board of directors selected by Ergen, or worse yet, a judge with no business experience. It would stand to reason that the OEMs would want the factory installed XM radios to continue working.
Yet another potential clue can be found by subscribers who have been inundated with channel updates, which could in fact be firmware updates to enable the receivers of both companies to work off of the same basic system.
All of this means of course, that if in fact Sirius XM can now provide both services over the Sirius network alone, that the XM Satellites and repeater network are now a disposable asset. As most of the companies 2009 debt obligations are backed by these same XM assets, the company would be wise to use these as a means of ridding itself on the huge debt burden placed on it since the merger with XM. By simply putting XM holdings into chapter 11, Sirius will in fact eliminate 2/3 of its outstanding debt. It would accomplish this, and save its investors as well. Sirius XM currently has about $3.2 billion dollars in debt. Out of that debt, Sirius owns about $1.1 billion and XM owns the other $2.1 billion. The only debt that Sirius has due this year is the $174 million payment coming due next week. The rest of the $783 million is all XM’s.
The bottom line may be that Sirius will have acquired all of XM's subscribers with the merger, and none of its debt.
Position: Long Sirius XM
First problem — it is the Sirius debt that is due next week that they need Chapter 11 bankruptcy protection for… not the XM debt.
While I understand what is being discussed, it is not practical in this situation — at least, not at this moment.
The XM debt issues coming up first are the bank debt, which will more than likely be extended. Then after that, the Dec09 maturities are the real issue. However those don’t mature for another 11 months. When you file for Chapter 11, your are asking for bankruptcy protection to help you because you defaulted on loans. Since the XM debt does not mature for 11 months, Sirius will not default on it before then.
The problem is the Sirius debt due next week. Before people bring up the current cash on hand situation — I discussed this at length on Yahoo. When you add the Feb09 debt maturities in with the amounts owed to the NFL, MLB, SS-L (satellite CAPEX) and other current creditors that are in accounts payable – and you’ll see that Sirius does NOT have the working capital to get through the quarter. It is the Sirius debt that is being defaulted.
You cannot default a subsidiary over debt that is backed by the parent company.
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Homer, this seems logical and you seem like your not living in OZ like some of our authors. do you think we will see BK in the coming days? Mel seems to be setting the stage for, “we have exhausted all options including any possible sale or refinancing, therfore, regretably must file for BK protection”
Jdare, we would all like to see “new and fresh ideas” however it would be nice not to have a far fetched fictious scenario thrown at us when the authors insist over and over that SIRI is “highly unlikely to be a BK canidate” I have followed the site for years and appreciate the hard work of all, however, these authors are much smarter then this! So what is the mtive? I no longer know? But it’s begining to sound a little fishy or far fetched.
Second problem… you want to “dispose” of the XM satellites? To do that, Sirius must replace all 10 million of XM’s active receivers. Even at a cheap cost of $50/receiver, who is going to fund this $500 million replacement program? You think the subscribers will? Did you all forget about the Sirius and XM gauarntee (both publically and before Congress) that no receivers will become obsolete? The only way around this is if Sirius replaced the 10 million current active receivers — and the havoc it will play on the other 10 million non-active legacy receivers.
Furthermore, while XM’s debt is secured against XM’s assets under the XM subsidiary — you all should know that XM’s license and satellites and all of its assets fall under the XM subsidiary too. If you put XM into Chapter 11, then all of its assets go in there too — including XM’s subscribers… they are an asset to the company.
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What if you could send the radio in for a chip swap? Could be cheaper.
Finally, let’s say you get around all of the above — you bankrupt XM and liquidate, but somehow manage to keep its subscribers….
Who’s going to buy XM’s licenses, satellites and repeater network? Without any subscribers? Especially when all it can be used for is satellite radio? You can’t just use it for something else… the satellites are specifically designed for the S-Band… even more specifically, 2332.5~2345 MHz. And that portion of the S-Band is only allocated for DARS service. That limits the uses.
Sorry, but I disagree quite a bit with this premise. While I did speculate at one time about bankrupting the subsidiary — it is possible. However it will have detrimental effects on the parent company, as half of the parent companies assets would be frozen in bankruptcy court (actually MORE than half, because of the re-valuation of the XM licenses). It would murder the common holders… not that that hasn’t already happened.
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good stuff homer . . . i feel like all of the remaining oxygen just got sucked out of the room
what a thread killer!
guys, we need a new article quick . . . lol . . . this one is done.
Homer, thanks for the all the information. pretty much covers it, Technology restricted to SDARS, Legacy Receivers not becoming obsolete (that’s why they “simulcast”), and license moving with the BK of the subsidiary not to mention its Sirius’ debt due. So how does this work when Sirius files…… 🙁
Thanks for coming over from the dark side (yahoo) homer…
Perhaps we can discuss this more indepth over in the forums? But as for this post: Both licenses belongs to Sirius, not XM. Secondly, we are talking chapter 11 REORGANIZATION, not chapter 7. Part of that organization may include getting rid of some property, but mostly it is to force reorganization (and postponement) of debt and contracts.
I have more, but I have a meeting to go to. I’ll follow up with you later tonight/tomorrow.
newman, homer truly believes he’s the authority when it comes to SXM but he definitely needs to speak to a securities law attorney to find out more about the corporate structure of the newly merged SXM.
I don’t know whether the company is actually considering this option but I think it’s certainly a viable one. I guess it comes down to screwing the bondholders versus the shareholders and since the shareholders have been screwed big time since the merger I’d say it’s the bondholders’ time. Having said that, this is a very complicated matter and it’ll come down to what SXM’s attorneys think/advise.
>>>SIRIUS XM Stockholder says:
“homer truly believes he’s the authority when it comes to SXM but he definitely needs to speak to a securities law attorney to find out more about the corporate structure of the newly merged SXM.”
~~~~~~~~~~~~~~~~~
Feel free to dis me all you want, but you should do your homework too. Try reading the latest 10Q’s of which subsidiaries own which licenses… it can’t be any more clear.
The Sirius FCC license is held by the “Satellite CD Radio, Inc” subsidiary; and the XM FCC license is held by the “XM Satellite Radio, Inc” subsidiary.
Now run along and look at Brandon’s chart above — look to see where on the depth chart each of those subsidiaries are… you really think you can bankrupt the XM subsidiary, while the XM FCC license is held by that subsidiary — and it won’t get tied up in bankruptcy court?
Try reading the XM 10-Q that was released on November 12, 2008…
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Homer, cos,
Xm could default on the mlB payment due and file chapter 11 now, no?
XM has the cash on hand to make that payment. According to the XM 10-Q, it had $215 million on hand as of 9/30/08.
With positive FCF in Q4 and maintaining a minimum cash balance of $75 million — XM still has the room to do this.
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Xm has 2009 and 2010 in escrow as I understand, renegotiating with them for a lesser amount to escrowed for 2011, could reduce 09 expenses. If they can agree on a plan.
cos, according to the MLB contract, the escrow amounts are for the final 2 years of the contract, which are 2011 and 2012… not 2009 and 2010. That NYTimes article was wrong. Don’t know where they got their info from, but I got mine directly from XM’s last 10-K. XM still needs to come up with cash for this and next year.
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I got it from the 10Q and assumed that it was for 2009 and 2010. Do you have another reference that is more specific??
Under XM’s multi-year agreement with MLB for the rights to broadcast MLB games live nationwide and be the Official Satellite Radio provider of MLB, XM is obligated to pay $60 million per year through 2012. In May 2008, XM provided $120 million for an escrow arrangement for the benefit of MLB to replace an expiring surety bond. In connection with funding the MLB escrow arrangement, XM borrowed $62.5 million available under its $250 million revolving credit facility. This MLB escrow arrangement reduces its unrestricted cash liquidity, and could have an adverse effect on its financial position if XM is not able to replace the escrow arrangement with a letter of credit or otherwise.
Also just so I understand and for sd-08’s benefit, the $75M cash minimum balance pertains to their bank lending agreements not the MLB agreement. It can only be lowered with a written agreement from the banks involved with that revolving facility or else the would be in violation (breech, default not sure of legal term) of their agreement.
Cos, this is from XM’s last 10-K:
(page 49)
“The agreement requires us to deposit $120.0 million into escrow, which represents the amounts due for the 2011 and 2012 seasons, or furnish other credit support in such amount.”
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Homer, thanks I was looking for it in their last 10Q. Read the 10K and it is as you say….
Hey everyone……………sort or read your banter while on the road……just got in and I see that we’re back to where we began.
SIRI/XM=May go BK, and despite ‘Newman’ citing a difference between Chap. 7 and Chap. 11, everything I’ve ever read or heard is that it doesn’t matter for the ‘common’ shareholders. We are viewed as expendable it seems…………………..So who cares, unless you’re a founder. And even though, after all the years of sacrifice and investing, we may FEEL like we are founders, the sad reality of it is that WE ARE NOT; that we are but stepping stones on whose blood sweat and tears, professional gamblers, and smooth talking sales folks, the likes of Ergen and Karmazin, seemingly stake their claims to fame and fortune, and somehow ultimately advance the better-ment of the human race, etc, etc, etc. Who one day will be so appreciative to them for the new era ushered in of SATRAD, as Stern so poignantly emphasizes. We and our efforts and monies to HELP GET THE INDUSTRY here, will be less than a passing thought, but to ourselves and doubtless disappointed families………
So unless some 11th hour reprieve occurs that also somehow benevolently spares the throngs of investors both little and large…………………………..I am Fearful for the worst, Sorry.
I believe our only chance is Liberty… and we’ll get diluted big time. But we’ll still have SOME value..
Are you serious ? Dilution is 99% in already with the stock at .075 cents. Any cash infusion will send it soaring huge % on the news.
Sorry Brandon, whether your right or wrong, I can’t get over your headline on this article.
The Headline is Banter for the Illusion.
If this truly beautiful ‘coup d’grace’ was actually possible, it would’ve been known by Wall St. firms from the start of the merger, or so I think.
Who was so blind, and what is Mel, now that he ‘found out’ waiting for??
For more penny-enne shares to buy………..?
Coup d’ grace
As for the speculation of the current cash on hand,,,,,,,,,
I think all of these numbers that are being thrown around are incredibly conservative………
1. Not one mention of what “best of both” may have produced in Q4.
2. Not one mention of what the “lifetime sub” may have produced in Q4 or this current Q1.
3. The savings that may have been produced from synergies could be far more than expected due to the massive lay offs and the station consolidation. (I do admit that the severence pkgs could have been costly)
If you chose to be anything other than conservative, you could make an arguement that they have $750m on hand……………..
Start with $360 million…
+ Add in FCF from Q4 of about $75 million
+ Add in 3 million b of b, ($4.99 x 12 months)= $179 million
+ Add in 2 million lifetime upgrades ( an extra $200 x 2 mil) $400 million
Hell, that equals over $1 BILLION and I think the b of b and lifetime converts are CONSERVATIVE!!!!!!!!!!
Someone explain to me how those numbers are so far off?????????????????
Methinks that corporate malfeasance and greed have probably taken these profits and our investments and distributed them to ‘et al’……………
Your numbers are probably good, but when the Big Three come begging for money from Tarp, and Brokerage Houses distribute big bonuses for top exec’s while also begging for funds from tax payer’s……Who would fault what is starting to look like to me, a Collusion twixt all the satellite ‘Mogul’s’ and our funds.
After all, to the rest of the Nation we have ‘expendable cash’ and I guess we don’t pay taxes either!!!!!
SD –
I have been bringing your points 1 & 2 all day on different posts and you are the first one who is seeing this. I do think the cash level you are speaking of is a little over the top, but 150M net increase is very possible.
Let’s say 5% or 1 million took the best of and paid for the year upfront because that was the deal, so on the somewhat conservative side $150/yr X or 150M upfront. If 20% of the family subs or about 1 million again grandfathered in, that’s another 84M at $7/sub X 12 months.
There’s 184M, but let’s just say it’ ony 3% on the Best of and 10% of the $ price price increase, we’re looking at close to 100M extra cash by now.
I think Sirius could have the $, but just playing all thei options- let’s see tomorrow.
http://www.fool.com/investing/.....hpa0000001
Someone post the latest WSJ article please.
“Sirius XM, Ergen Move Closer…”
Thx
This headline should give the stock some life tomorrow morning, but we need details and will Liberty one up Ergen and offer a decent buyout for shareholders.
I have a question, if there is any deal struck how could the shareholders be wiped out. Now of course the stock could be diluted to hell making our shares worth alot less but that is still not wiped out. I mean unless the deal included us being bought out for 1 cent a share or less. I think for a deal like that doesn’t there have to be a vote of some kind.
If these ‘saviors’ of the company don’t want to buy out the investor’s , but we don’t file for BK, then perhaps that means that we will continue to struggle with our penny stock until hopefully a better day……………..
It still beats ZERO I guess……………………………..!!!
PS: Has anyone seen the Wall St. Journal and their comments this AM?
Most observers doubt that Sirius will follow through with its threat to seek bankruptcy protection. Such a step would wipe out its equity holders and likely leave many of its creditors, including Mr. Ergen, with nothing.
In one indication that it won’t pursue a bankruptcy filing, Sirius has approached holders of about $200 million in bonds maturing in December about converting their paper into more senior debt and equity. Such a step would be pointless if the company expected to go under.
Hopefully this means, unless Mel ‘wipes us out’ himself, that we will survive to fight another day !!!!
Malone meeting with SIRI board today (CNBC reports)
It looks like Liberty Media is presenting a restructuring plan for Sirius that includes taking an equity stake, but not wipeout of shareholders.
Ergen could up the Bid.
Hold on tight, we could be shooting much higher.
Still in the Front Row With My “Boyz”. Had to hit the head a couple times.
C’mon Sirius. Keep this thing afloat and “Show Mel The Money,Someone”.
What’s Up All.
Hi So Cal welcome back….
I increased holding to 30,000 shares..last 10,000 were at .057 to avg down to .406..hope to reach that in few months to get out.
GLTA
In about the same as you. 38,000 at .41
Right on Hope. I’d like a Big Celery Stick in the Bloody Mary. Thanks.
Not getting out at all !!
120,000 Shrs and counting !!
SIRIUSLY LLLLLLLLLLLLLLLLLONG!!!
One interesting thing about the price dropping so much. A lot of the weak ones are jumping ship, while us too confident (or stupid) to get out are going all in. It will help the price rise to have more long holders in the stock when we finally get something positive. When everyone sees positive news and wants some Sirius stock, we’ll all be asking for crazy amounts.
Faber report this morning (friday) reports Liberty group to go in front of Sirius/XM board to propose their plan
If true, it would make sense that mel has agreed to that plan and has Tabled it to the board for their review hmmm
ps–Faber also said no BK in plan–shareholders could be saved
Faber is usually very reliable…………….
C’mon baby. Take us home.
Bye the way. Cudos to all on these threads this past week. Homer Cos SRK and all. Great posting. Newman, Charles and Tyler. Thank You.
Brandon. Well, hey how about this. We get a nice positive investment and I’ll add a sub in your name. How about that.
C’mon baby take the shorts to the house……OF PAIN!!!
Is it possible that mel showed malone the 4Q results before the release to show subs/profits growing and that has caused him to make BOD proposal?
he might have but im not sure the figures will be good for the 4Q–I think maybe he showed him the update on synergy savings with possible new agreements with nfl, mlb etc(ie lower costs)so that going forward we are cash flow positive-
plus discussion of some other deals(apple, new products etc)that shows the growth anticipated(with the outstanding debt solved, of course)
I just want to give some people some hope here…
I don’t play the markets much, but once every few years I get a good feeling about a stock. The first time was Wal-Mart as it was sitting at 17 1/8 I rode that for almost a year and sold at 39, but it climbed up 6 mos. later to 80, that was back in ’95. About 4 years later, Phillip Morris was sitting at 17 about 6 mos. later 79. Sometime in in like 2003 when I was working for Illinois Power the holding company, Dynegy was sitting at .25, four or 5 mos. later it was back up to $4. I’ve got the same feeling here, I bought in at 5 1/2 cents/share on Wed. 8,000 shares. Then on Friday I bought another 2,000 shares to make the math easier. I don’t have much money like some of you nor am I a day trader, just an ordinary working stiff! Guys don’t jump ship I think we’re sitting on a pile of gold!