Sirius / XM: A Merger Of Equals
I have spent the better part of the morning trying to answer the question on everyone’s mind; What will happen with the stock price? I have read through analysts reports that put such a wide range of targets on Sirius, that I thought it might be time to pretend there were no reports whatsoever, and create my own.
Keep in mind, that mine is no better than any other out there, and you should not invest on my results. I have made a LOT of suppositions to fill in the blanks. There are just too many unknowns in the look ahead to arrive at anything but a speculative conclusion. I hope as everyone else does to hear from Sirius regarding its future plans and projections this week.
So I broke out the legal pad and calculator, printed out Sirius and Xm’s SEC filings, and got to work. I looked at last year and assumed results as if we had a year of data to work with. Side by side and adjusting xm’s float by the 4.6 ratio, the first glaring fact is that this truly is a merger of equals.
My immediate concern is that as such, the combined company’s stock price won’t change much with the merger, assuming current valuations are accurate. Because of the synergies however, the stock should warrant a higher combined value, as profitability will occur sooner as a merged company, than as “stand-alone’s.”
Going forward requires some fortune telling. I had to look at the individual expenses of the 2 companies and make some assumptions on where costs could be reduced and by how much. It’s my belief that the 400 million stated by the companies recently in synergies is grossly understated, as I could easily turn that into a billion dollars without trying very hard. Just look at what Mel Karmazin acheived in 2006 -2007 when he reduced the net loss by 1/2!
I then had to assume revenue growth based on what we know and also assumed revenue streams from increases in advertising and other media and licensing potentials. In the end, I can see how Merrill Lynch came to their 4.50 price target that they have issued. I also can see that the 4.50 price target is based on current sat rad growth only, with some cost cutting. Citi has a much higher target, which I believe takes into account additional sources of revenue that we officially have heard nothing about, and a higher amount of synergies.
The problem I found with Goldman Sach’s assessment is that it goes against anything that the previous revenue growth has demonstrated. They seem to be assuming only one revenue stream from satellite radio and oem growth, and joining the 2 at the hip without understanding the basic fundamentals of increased penetration and how these subscriptions are paid for, by whom, and completely ignore any other potential sources of revenue.
In the end, I agree with Merrill Lynch, with an additional range to 6.50 should we add an extra 500 million dollars annually from new revenue streams, and cut costs accordingly.
Position: Long Sirius, XM.
Thanks for the assessment Brandon. Hopefully, you are 100% correct!!
I can see $4.50 – our price has been depressed by the long wait but we weren’t far from there when the two announced their intent to merge.
I’ve wondering for weeks whether goldman sachs even knows this is a subscription business – they point to low retail sales as proof of a sharp decline in revenue as if siri/xm are just in the business of selling boxes. Any sale be it retail or oem brings with it an ongoing revenue stream (minus churn of course).
I think a psychological factor may come into play. Obviously, much of the main stream media has been openly opposed to the merger. All one needs to do is watch CNBC, or read most publications to see the bias. That bias being based in the NAB. Most of the MSM, and print media are NAB members, and scared to see the old advertising model disrupted.
However, with this deal ‘complete’ I believe the bias will give way to investment minded thinking. The msm and print press have no reason to continue to defend the NAB, hence, they should start touting the merged companies as a good investment.
So, how much is psychology worth? More that $4.50 pps. If it plays out as I believe, start looking for positive press from form detractors. They will see the potential for a windfall and jump on board.
My prediction: $6.00 – $9.00, with a few months.
What is going to happen to the XMSR shorts? There is more % float short in XMSR which means that people will have to cover those with 4.6 shares of SIRI if they wait, so with the ARB this is a losing proposition. This leads me to believe they will cover as soon as possible.
The covering of XM shares will then drive the xm price up which drives siri price up. Since there are no more shares left to short I think this is the driver for the move up on Monday.
Also, the volume required for all of the xm folks to cover will be in excess of 30 million alone therefore in order to compete with other buying XM volume should be ___ millions ???
When people say all the siri shares that are short are covered with XM shares which are owned, they are correct but there is still another whack of shares that need to be bought on top of the relatively neutral buy/sell arb spread.
Looking at cash into and out of the stock as a whole:
In: 35? million xmsr shares -> 165 million siri shares
In: the amount of siri shorts who are used for arbitrage
Out: the amount of xmsr shares who are used for ARBitrage
he dollar amount in >> the amount of dollars out.
Keep in mind there will also be institutions who will be more inclined to increase their ownership now due to the removal of merger risk and new potential upside.
Actually there is slightly less short with xm on a percentage and actual basis.
In regards to daily trading, my post was more long term intended. My thinking on tomorrow is anyone caught short xm is in for a world of hurt. The spread should instantly be 4.4 – 4.6. My guess is sirius 3.00 / xm 13.80 at the open.
I would expect both stocks to rise, possibly to the point of over-exhuberance, which would make for a good trade if timed well.
You would think the ARB being gone will mean less selling pressure on sirius. But as the Dow Jones article pointed out, there aren’t any sirius shares to short and it declined despite that fact. What we saw last week was selling into a rally, by someone or someone(s) with shares to sell.
Sirius is also on reg sho still, so that could help the over-exhuberance. I expect wild fluctuations near term…
I had said the samething before:
163888
Jul 02 07:02 AM
Just wait till Mel gets his hands on XMSRs books. He is going to cut so much extra fat that few at XMSR, thought even possible. I believe in Mel, and I believe that if he says 400 million now, that by the middle or end of 2009 he will be revising that figure up. It has always been his MO. I believe that because he has not been able to truely see XMSR internal workings he was very conservative on that 400 million estimate.
It doesn’t matter that xm has slightly less % short than sirius. It is still 35 million shares that need to get covered before the arb closes otherwise they lose more money because now they can cover their shares with the ARB discount and if they wait they have to cover the full 4.6.
The siri shorts (even those on regsho) are probably all covered with XM shares so if you sell all your xm and buy back all your siri you made % on most of the spread. The XM short shares are not covered with anything (other than maybe out of the money calls)?
here’s the way i see it:
total xm shares 320 million x 4.6 = 1.5 billion. total shares of sirius after conversion is roughly 3 billion x 2.25 per share gives a total market cap of 6.7 billion. combined market cap before merger was 6.4 billion or almost the same. the merger surely increases the overall value so the price of sirius has to increase to reflect this. cost savings, synergies, positive cash flow, etc. this is starting to look very undervalued at friday’s closing prices…
Why do the 35 million need to get covered. Many of those shares were shorted from 40.00 – 20.00. Most are in the money. If the deal goes off 17.00 a share they still make money. There is no need to cover.
The mucher lower percentage of shares that were shorted from the 17.00 range down to current levels is different, but there may only be 5 million of those.
As for Sirius, they have consistently had over 100 million shares short for many years, well before an arb play factored in. Many of those are short from 9.00 down and are well in the money, so there should very little urgency to cover those positions either.
Sirius’ advantage will be those who late to the party and shorted from 4 down. Those people will be looking to unwind to lock in profits and prevent losses.
Xm will trade around 4.6 of sirius. no more, no less…those who shorted at 8,9, or 10 are going to lose a lot of money.
1 other reason to discount a potential (massive) short squeeze is that smart traders would have covered with options…
The price will go up based on company outlook and buy side demand only, imo
Ok. I was assuming the arb wouldn’t close first thing… then if you have the option of covering 4.5 shares of siri or 4.6.
If it was me, I would take 4.5… and cover early, then reshort when the arb closes.
Also, if you look here you will see that over half of the 35 million shorts were added since march…
http://www.nasdaq.com/aspxcont.....ected=XMSR
After listening to you guys, I wish I bought more xm…
You’re right about the options though, which is what I was saying above…
Regardless, the short position in siri is covered and xm is not except via options which means that unless there is going to be a huge amount of profits taken from options to reshort shares which can no longer be shorted then I think the equities stay up.
crfceo, don’t worry because xmsr can’t trade above the 4.6 to 1 anyways which is what that moron dukeufinstu on the yahoo board is trying to tell me right now in his huge thread from today.
Siri will trade up because of xm. Think of them both now as a combined entity and the amount of dollars goign into and out of the combined total share float.
Also crfceo, all my yahoo posts are getting rated by 3 1-stars first thing so that nobody reads them…
I haven’t been on yahoo much…too many desperate shorts who think message board posts will lessen their losses…the forums are pretty good here at siriusbuzz to get a noimal dialogue going. They don’t put up with nonsense
Ya, it’s bullshit and fearmongering.
I own some XMSR. Is the best thing to do to sell it Mon when it looks like it’s peaked? Or do you think it’s best to hold on to it because the 4.6-SIRI share ratio will help (at current market share prices) looks like it will favor XMSR owners?
hey my yahoo friends! guess this is the new “yahoo” stock boards!
cefceo, Just so we get something straight it is not just the shorts, that make the Yahoo board such a crap ass place to be. There are also many longs (or short time longs that got in just for the merger) that also contribute to the crap on that board.
you got that right shark! At least here we get real info….make sure you register with the forums. I think we should just take them over!
https://siriusbuzz.com/forum/index.php
I’ve decided to hold the majority of my shares in xm while I’ll sell off a piece of siri depending on the size of the pop. If it opens down or sideways I’ll just hold.
Would conventional thinking in this situation be to hold XM if you own it? Sorry for my ignorance…
I would certainly hold xm yes. At this point, xm is the better one to hold and you might as well wait til you hear what the new company has to offer and wait for some upgrades (because 100% for sure, they are coming). Almost everyone was including merger related risk into their models previously which will likely have to be removed although the interest incurred as a result of refinancing and the merger costs will likely cause some negativity (which has already been factored into the stocks along with the slow car sales).
I would 100% hold xm.
To add, I am buying xm on weakness or even if the ratio of siri to xm shares isn’t closing in the xm share price.
I really appreciate the insight, and it sounds very smart! Just one more quick one? Would you hold XMSR, regardless of how much the stock peaks Mon? Or is there some high point where you might consider selling some or all XMSR? Thanks!
Two things…
— The bulk of XM’s remaining short shares are left over Arb positions from when XM issued Convertible debt in 2003.
— Unlike Options… short positions do not “transfer” over to Sirius short positions. With Options, there is a legal contract between the seller and the buyer (short and long positions); however with short sales of shares, there is no contract.
When the exchange begins, the Transer Agent will “DEMAND” that all XM shares be delivered to them immediately. This is when all long shareholders deliver their shares to the agent, and the agent gives them 4.6 shares for each 1 share of XM.
The problem for short positions is this — they short seller borrows the shares to sell short from a brokerage house… who takes them from long positions held in their name. When the transfer agent demands them to be delivered, the brokerage house has to have them all-hand… which means they go after the short-sellers and give them margin calls to close their short positions. The brokerage house then delivers the shares to the transfer agent on behalf of their clients.
Options are not shares — they are contracts. They will have their terms adjusted by the CBOE, and you’ll become option holders in Sirius. Short positions however, if you do not close them — your brokerage house will, either by a margin call… or they’ll do it for you. They have no choice… and they certainly don’t transfer over as short positions in Sirius.
——
Well, all I would say is that if you are planning on selling, make sure you are either willing to buy back in at a higher price and then certainly be ready to buy back in once you figure it has receded enough.
I would suggest that the resistance in sirius around 3.20 will cap the stock in the short term. That would mean that at a siri:xmsr ratio of 4.5 (to provide a small discount) the xmsr price would be ~14.40. This would represent a >50% premium over Friday’s close.
I don’t think it’s likely that siri will trade at 3.20 for long and I don’t know how the arbitrage will play out. I’m just saying that without seeing specifically how it is trading tommorow, if I was setting a stop now, I would not give my shares away for less because the outlook should improve and there should be MUCH more clarity going forward.
Thanks homer, I didn’t think that short positions transfered over but I was told otherwise.
Regardless, you would want to close your short before the arb was at the 4.6 share ratio.
Thank you! It’s always nice to listen to people who know their stuff.
Also homer, if the remaining short positions are due to the xm convertible debt, and taking into account the growth in short position from ~15 million in march to 35 million now, are you suggesting that there has been accumulation of the debt as well?
“Short positions however, if you do not close them — your brokerage house will, either by a margin call… or they’ll do it for you.”
That was actually the point I was trying to make.
I would assume that the XM convertible debt holders already sold Sirius short a long time ago (at the 4.6 to 1 ratio)… and will use the cash they raise to cover their short position in XM.
homer, you god dam “know it all”, thats why I like yea.
So you think there will be a rash of short covering in both sirius and xm tomorrow?
Not necessarily covering in Sirius — perhaps we’ll see more shorting though.
Convertible arb players bought XM’s debt at the end of 2004; most often those holders immediately shorted the equivalent amount of shares… at which time, XM’s pps was around $35.
These holders shorted XM to lock in their profits, via the Arb. They could close their short position in XM now, but that would still leave them with some risk.
So these holders can also take advantage of the merger arbitrage — and now short Sirius an equivalent amount, then take the funds raised from that to close their XM short position. Then to close their “new” Sirius short position later, they can use the converted shares when the debt matures — however, since it is greatly underwater, XM will have to buy it back… so they will then use that cash to cover the Sirius short.
Look at it with numbers…
You bought $1 million worth of the 1.75% Convertible Notes from XM. These Notes have a conversion price of $50; meaning, your $1 million will convert into 20,000 shares of XMSR when the stock matures. So you immediately short 20,000 shares of XMSR at the then market price of $35. This puts $700,000 back into your pocket.
These holders must cover their short position — but first, they will short 92,000 shares of Sirius first (4.6 x 20,000) at the current pps of $2.25. This puts an additional $207,000 into your pocket. You then, cover your XM short, 20,000 shares at 9.28… this cost you $185,600. You’re now up an additional $21,400.
So you wait for the debt to mature next year — you still have $1 million in convertible debt that now has a “Sirius” conversion price of $10.869 ($50 divided by 4.6). Obviously it is underwater, so you can demand that XM pay you cash. So they give you your $1,000,000 back… but you have to cover your Sirius short.
You cover your Sirius short position at perhaps $5 each (92,000 x $5), which costs you $460,000.
You’ve just made a killing on this position. Why? You loaned them $1 million, which you get back in the end — but you shorted against it and raised $700k; plus an additional $21,400 on the merger arbitrage; plus an additional $200k in interest payments; minus the amount that it costs you to cover your Sirius short… leaves you with $465,000+ in profits for 5 years.
I would expect the long-term XM shorts to go out and short Sirius — if they haven’t already done so.
–
Homer,
Only problem is that there are no sirius shares available to borrow. Sirius is on regulation sho again. The only way that could happen is illegally.
Which is why I partly believe that most XM convertible holders shorted awhile ago.
Those guys are pro’s.
I meant to say that XM convertible holders shorted SIRI, awhile ago.
I understand the numbers behind owning the convertible debt but, I don’t think that they would have shorted SIRI a while ago unless they saw no merger risk which was not what I was hearing.
What I don’t understand if that’s the case is why XM has increased the number of short shares by 20 million since march.
Also, you are assuming the ARB does not close before the open tommorow and they open at Friday’s close.
Also Homer, when you say that they shorted SIRI a while ago it still means that the XMSR shares need to be covered somewhere and likely Monday or Tuesday.
I have started a post in the Sirius Stock Chat forum so that we may continue the discussions there.
https://siriusbuzz.com/forum/showthread.php?t=588
Remember, joining the forums is a free registration, and SiriusBuzz does not spam your email or sell your email!!
If you are tired of the degenerate yahoo/google boards, you will LOVE these boards.
Come to think of it homer, You might be right that siri got shorted all day on Thursday after the announcment to the point where nobody can short anymore shares.
Nevermind, sirius is creating a special equity offering to allow the xm shorts with convertible debt to stay short.
The arb got bigger this morning… interesting… apparently the merger isn’t going to happen or else the arbitrageurs want to keep their spread nice and fat but others can’t take advantage of the spread because there’s no shares to short and nobody wants to go strictly long xm because the price is dropping?