Sirius XM: What’s Going On With The Stock? Part 2
Yesterday, we took a look at the stock from a technical perspective. Today, I wanted to focus our attention on the fundamental side of Sirius XM. I think the debt issue has been beaten to death by naysayers, and my position is firm: It’s a non-issue. Refinancing of some debt will occur in 2009 and in my opinion will be more favorable than it currently stands. Sirius XM will have a much better balance sheet and as such should see an improvement in their credit rating by that time. This should lead not only to better rates but also better credit options.
Speaking of balance sheets, Sirius recently released its second quarter report. One of the attachments to that report includes a combined financial statement. It takes some getting used to but this is the first clue we have as to the potential strength of the combined company. I say potential because it does NOT include any synergies of the combined company.
It is for this reason that I am not going to cut and paste a bunch of numbers that only an accountant could understand. I’ll save that for an actual combined report complete with synergies included. The first thing that caught my eye was the purchase price that Sirius paid for XM of only 5.7 billion dollars. My first thought was that if you liked the deal at 7 billion dollars, you must love it at a 1.3 billion dollar discount.
As I studied the balance sheet to understand the new structure applied, I made a remarkable discovery. Sirius XM is trading below its book value of 1.60 per share! Simply put, the combined company has total assets of 10.6 billion dollars. It’s total liabilities are less than 5.9 billion. Shareholder Equity is 4,714,068,000. That is not a negative number. That represents the amount of money would be divided among the 2,948,309,000 shares outstanding.
This is proof positive that the company is undervalued, in my opinion. Not only is it undervalued, it is undervalued based on the combined company providing absolutely ZERO in combined synergies. The book value will no doubt rise even further when the synergies are actually realized. For more on this, visit the SiriusBuzz forums.
Position: Long SIRI
I was really amazed as I was reading this that Sirius XM actually had a positive book value… I was wondering, how could I have missed this? How could I have overlooked the ‘fact’ that Sirius had a book value of $1.6 per share?
Well, Brandon, I was able to overlook this simple fact because because I am not an idiot! The numbers you state are accurate, b ut you fail to mention that as an asset, Sirius XM includes over 6 billion in goodwill and intangibles. These are items that are by all measures, simply fictional, and have no worth on the open market.
So, to summarize, yest the book value is about $1.6 per share, but if the company decided to close up shop tomorrow, the actual net liquidation value would be zero to the investor, and about a billion negative to the bond holders. This is based purely on this balance sheet. Of course the FCC license would have increased in value, and on the open market, some assets would have appreciated, but that is impossible to conclude from the balance sheet.
That was a very well thought out, well written response…over-ruled! (My Cousin Vinny)
Several weeks ago I wrote that it would be better for Sirius to buy XM at the lowest price possible, because for accounting purposes it would be logged into the books as an asset and the low cost would be reflected.
Fortunately for investors, this did in fact happen. It just so happens that Sirius bought XMSR for a cost of 5.7 billion dollars. As it turns out, those assets have a current market value of 11.5 billion dollars.
The “goodwill” you are referring to is the difference between what was paid for the asset (XM) versus its cost. Think of it as home equity.
Basically, if Sirius was to turn around and sell xm, the value to a would be buyer is 11.5 billion dollars. That makes it an asset.
As for intangibles, this includes items such as patents. There are two primary forms of intangibles – legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how, knowledge), collaboration activities, leverage activities, and structural activities). Legal intangibles
generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization – and
therefore costs, revenues, customer service, satisfaction, market value, and share price.
All of this is standard accounting practices and does not change the fact that Sirius XM has a book value of 1.60 and is trading at 1.49.
I said myself that the book value is 1.6… I never denied that. But that in itself does not mean that it is undervalued. Book value includes the goodwill which is ambiguous.
In rough times, goodwill is routinely written down, sometimes even eliminated.
It just seemed that in your article you were trying to say that Sirius XM is a type of value play because it is trading below book value. On the contrary, I am saying that, while it is a good company, and I own many shares, it is not a value play simply because it is trading below book value, since book value is highly inflated by a massive goodwill and intangibles figure.
Remember the huge losses posted by AOL Time Warner several years ago. I don’t recall the exact numbers, but they were like in the 20 billion dollar range. They were all because of the write down in goodwill associated with the merger. So, while I don’t expect this to happen with the Sirius XM merger, nonetheless, with such a large goodwill figure, the balance sheet and book value of the combined company is skewed and in my opinion, not particularly useful at valuing the company.
Problems with goodwill writedowns occur when a company overpays for another company. In this case, Sirius under-paid due to market conditions and the price of the stock.
As for your claim that the goodwill figure is skewed somehow, I challenge you on that. Large corporations are subject to external auditing and as such are not so likely to skew data. Private and small companies have been the ones that fail to follow the rules.
Brandon,
With the closing price of XM at 8.70 on the day the deal closed, wouldn’t that equate to ~ 2.7 billion (312 million shares) market value purchase or are you referring to the Enterprise Value of 5.7 billion ?
I also have a hard time understanding why is matters what price it winds up being purchased at since it is being purchased in shares, not a set $ amount, like $8.70/share.
If we convert Sirius back to XM by multiplying their share price of 1.49 X 4.6, the value of $6.85 is below the close of the merger.
Sirius @ 1.89 = XM @ 8.7, so right now we’re underwater even from the day of the closing, not to mention the combined market caps were 11.5 billion on Feb ’07 when they announced their intent to merge.
Now the combined market cap is 4.5 billion, a 61% drop in value, just to put things in persepective.
Even worse, they individually traded for over 10 -11 billion each or 21.5 billion combined market caps at their peaks (Sirius $9, XM $ 40) Today’s price of 1.49 is an 80% drop in market value.
This is unbelievable in my mind. The stock would need to get to $7 today to reach the 21 billion levels again.
Is this even possible in the next 3 years ?
Brandon, the closing price at the time of the merger conversion had no bearing on the “purchase price” of XM. The purchase price was pre-set… at $3.79 per share of Sirius, at the 4.6 per share conversion ratio.
The $5.7 billion is based on 312,328,183 times the 4.6 ratio — multiplied by $3.79 per share. This comes to roughly $5.45 billion… then when you add in the negative net value of the XM assets, it comes to $5.7 billion.
The purchase price is the consideration given to XM shareholders, plus the negative value of the assets… that is what is called Goodwill.
As I was corrected in the forums, they no longer expense Goodwill against the income statement — however, changes in the Fair Value versus the Carrying Value will be impaired against the income statement annually.
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BTW, I meant to add that the $3.79 per share was based on a 4 day average — the two days prior to the merger announcement and the two days after the announcement.
Also, while Sirius/XM is trading under the book value — I’ll add that this is considered the “intangible book value”, because it includes the intangible asset of Goodwill. In the event of liquidation, Goodwill would be lost… thus the negative value is still a factor.
However, as I noted in the forums — the XM spectrum was re-valued from $141 million to $1.3 billion, however Sirius’ spectrum was not re-valued. It stands to reason that Sirius’ spectrum would be valued at at least $1.3 billion too. This change would increase the “tangible book value” (without Goodwill) back to a positive figure.
I still contend though that the value of the spectrum is still worth more than $2.6 billion though. I believe that you can add an additional $2 billion on to that.
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