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Sirius XM (SIRI)
White Knight Rescues Sirius
Sirius was in talks with Liberty Media (LMDI.A: Charts, News, Offers) this past weekend, and it turns out the satellite radio provider found itself a white knight -- and not a moment too soon either. Towards the end of last week, the company was fending off a takeover from EchoStar (SATS: Charts, News, Offers) when CEO Charles Ergen applied pressure onto the company by buying $300 million worth of its debts. Because a portion of it was due today, it seemed like the company was at the end of its rope. However, they can breathe a sigh of relief. Shares of the company's stock rose as high as 20 cents per share in early morning trading. However, a stock selling for 20 cents is quite questionable. So, even though Liberty believes in Sirius, is now really the right time to celebrate by investing in the company?
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Probably not. Investors are probably revisiting Sirius' stock because it was able to convince Liberty to put money into the company. Regarding the investment itself, it will be broken into two phases: the first gives the satellite radio company $280 million in exchange for senior secured debt. Part of the money will be used to pay off the $171.6 million due today, while the difference will be used for general purposes (most likely restructuring in this case). This loan has a 15 percent interest rate and will mature by December 2012. The second phase of the investment will provide $150 million to XM, Sirius' wholly owned subsidiary. Liberty will also buy $100 million of the loans outstanding under XM's existing credit facilities.
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So what is being exchanged for all its money? In addition to the senior secured debt, Liberty will receive a 40 percent stake in the company (in the form of 12.5 million shares), as well as two seats on Sirius' board of directors. John Malone (Liberty's Chairman) and Greg Maffei (Liberty's President and CEO) are expected to take those seats. Nevertheless, Sirius was extremely lucky. They were able to give up a minimal stake in their company in exchange for the opportunity to continue operating independently.
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Bad news though, is still aplenty. The company is still in a liquidity crunch, and subscriber growth is stinted due to the recession. Most of their new subscribers come from new car sales but currently, those have been on a negative trend. Look at General Motors (GM: Charts, News, Offers) and Chrysler (F: Charts, News, Offers) for evidence. Those two are rushing to finish a government-mandated plan by the end of the trading day to prove to Congress that they are turning things around. Analysts predict that auto sales will improve around 2010, but the company has more debts due in 2009. This means cash inflows are not anticipated to rise while debts are going to be due. Given the fact that Sirius has yet to turn a profit, can investors really have that much confidence in the future of satellite radio services? Investors may say that the company experienced explosive growth under CEO Mel Karmazin, and became the sole satellite radio provider in the country. Still, it is hard to argue with continuous annual losses.
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So for every bit of good news that the company gets, there is some bad news of equal magnitude. Can Sirius really pull it off? Considering that analysts speculated creditors and shareholders would have removed Mr. Karmazin if the company declared bankruptcy, probably not if they do not change things around. For optimists, yes if they can get through this year. After all, 20 cents per share is inexpensive and the company has a monopoly on the satellite radio business. However, the words "annual net losses" are hard to get around.
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Click here to view a detailed profile of Sirius XM.
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