Tuesday, October 6, 2009

Sirius XM Could Avert Bankruptcy

Sirius XM's shares cannot get love from Wall Street. The shares have been stuck at the 60 cents range since August and a recent survey from the Street.com voted SIRI as the company most likely to go bankrupt. I mentioned SIRI as one stock to consider in my write-up Stocks to Buy in a Cyclical Advertising Recovery, although a majority of their revenues are subscription based.

The $4 billion market cap company (including the Liberty preferred shares) has $3.3 billion in debt with three quarters of that coming due between 2011 and 2013. With only $550 million in cash on the books today, 2010 will be a show me year in terms of driving the model to profitability and avoiding bankruptcy.

CEO Mel Karmazin is intent on improving the company's cash flow to avoid that scenario and I think he has a greater than 50% chance of succeeding. Couple that with Liberty Media's interest in avoiding a SIRI bankruptcy, I am inclined to consider the shares at these levels. Liberty can make a cash tender offer for all outstanding shares of SIRI that it does not already own between year two and three of the merger, according to company filings. However, as discussed below, a poison pill may inhibit that action prior to August 2011.

A reverse split is likely in the near future allowing institutional holders who face limits on share prices to buy the stock. Although the flip side is that shorts can come in again with a vengeance.

True is that the retail channel is dead and should remain so for sometime and that the dismal September auto sales figures, following the end of the cash for clunkers program, does not portend an exciting future for the company. However, I think Karmazin can milk the existing 15 million self-pay subs, which are declining only marginally, while continuing to cut costs from the model.

The company has guided for $400 million in EBITDA for 2009 and could likely beat that number. The recent music royalty pass-through fees are high margin revenues and should grow EBITDA along with the increased fee for family plan subscriptions and the add-on fee for Internet streaming. The used car market, where an estimated 15 million pre-owned cars are enabled with a satellite radio, presents an attractive growth opportunity.

In the coming years, more costs can be taken out by renegotiating the unprofitable Howard Stern contract, Nascar, and the MLB. I believe that SIRI has already renegotiated the GM contract, paying GM a lower revenue share and achieving lower subscriber acquisition costs. Further, satellite capex is likely to be reduced significantly beyound 2011 after the last spare satellite is launched into orbit, providing a boost to free cash flow. And don't forget the nearly $7 billion in NOLs that is valuable to an acquirer, although a poison pill put in place in April 2009 limits the value of these NOLs if the company is acquired prior to August 2011.

So alls not gloom and doom for SIRI. There is light and value at the end of the tunnel.

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