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6 Jun

Sirius XM: The Fix Is In

by

For those following Sirius XM (SIRI) since its collapse in the fourth quarter of 2008, the complexity of the subsequent bailout of Sirius by Liberty Media (LMCA) in early 2009 has become a more in-depth focus of discussion, as Sirius’ prospect of throwing off a bunch of cash in the coming years appears excellent.

Investors remember, as part of the bailout agreement, Liberty took control of Sirius by retaining approximately 53% of Sirius’ total outstanding shares.  Per the agreement, Sirius may buy back Liberty’s holdings at $3.66 per share, the stock of which now trades at a discount of $3.36 on Tuesday.

And according to Sirius’ most-recent 10-Q, the company needs to pay back $508M of 7% notes by December, the notes of which were originated in 2009 as part of the Liberty deal (subsequently sold to other investors).  These notes are convertible to approximately 270M Sirius shares, at a strike price of approximately $1.85 per share.

According to Sirius’ May 19 stockholders’ meeting presentation, the company projects some serious (no pun intended) “Adjusted” EBITDA and Cash Flow from the operations of its satellite service and equipment.  Revenue growth, cost containment, Gross Margin and marketplace penetration look very favorable to investors.

Even slight price-hikes during an overall tough consumer market hasn’t materially hurt Sirius’ revenue, because any impediment to existing customers of the company’s satellite radio subscriptions and systems has been swamped by new subscription orders.  So, Sirius has the luxury of a bit of pricing power, as well.

In all, Sirius is back on its feet.  The stock has soared to more than $3 per share, from approximately a nickel per share, reached at the worst of the company’s crisis in Feb. 2009.

Sirius’ Investor Presentation of April

According to Sirius’ first-quarter presentation of Apr. 24:

Year-over-year revenue for fiscal 2014 is expected to rise approximately 10%

Adjusted EBITDA to rise 18.4%

Cash Flow to rise 18.6% in fiscal 2014, to $1.1B.

Debt-to-Equity ratio target of 4.0, from a 3.1 ratio reported for fiscal 2013.

“Our leverage at the end of quarter stands at 2.8 times including nearly half a turn related to our deep in the money 7% exchangeable notes,” CFO David Frear stated in the Apr. 24 conference call to investors.  “We are likely to tap periods of opportunity in the bond market to issue new debt and to replace the 7% notes that will convert into equity in December of this year.”

Soon after, on May 7, Sirius filed a SEC 8-K, in which it stated that it has borrowed $1.5B at 6% interest.  In an accompanying news release, the company stated, “. . . the repurchase, redemption, defeasance, tender or repayment of its outstanding senior or subordinated indebtedness, including any borrowings outstanding under its revolving credit facility, anddividends to SiriusXM, its parent corporation, to fund share repurchases of SiriusXM’s common stock.”

After retiring $508M of 7% notes due in December, Sirius will have approximately $1.0B left from the proceeds of the $1.5B loan.

To add to the $1.0B of proceeds, Sirius still has $1.68B cash available to complete its previously-established stock repurchase program.

The company issued guidance for fiscal 2014, of which included an expectation of $1.1B of Free Cash Flow achieved by the close of the year.

And $940M is available from the its existing revolver.

In total, Sirius will have approximately $4.72B cash available by the close of fiscal 2014.

What Does All of That Mean for Investors?

Gleaning from Sirius’ stockholder presentation material of Apr. 24, the company emphasizes expectations of rapid “Adjusted” EBITDA and Free Cash Flow growth of 18.4% and 18.6%, respectively, for fiscal 2014.  Very little was mentioned of earnings per share, as Sirius didn’t appear to be interested in exciting investors with the prospects of actual earnings.

The presentation material also indicated that the company will re-leverage its balance sheet to a target of a Debt/Adj. EBITDA of 4.0, from last year’s 3.1.  And Sirius also mentioned it expects a 40% EBITDA margin in the coming years.

In essence, for now, it’s all about EBITDA (not earnings) at Sirius.

Conclusion

We can only conclude, then, that Sirius will not reduce its outstanding revolver debt or any other debt, senior or otherwise.  Instead, Sirius, we believe, will make good on its promise to leverage its balance sheet by raising its Debt/EBITDA ratio.   That will be the means of allowing debt to rise as the company uses as much available cash (earned or borrowed) to reduce Sirius’ 6.0B shares outstanding (but more aggressively in 2014) – a clever strategy now popularly deployed by Wall Street’s largest corporations as a means of maintaining earnings growth per share during this era of cheap money from the Fed’s ZIRP.

If raising the stock price of SIRI is accomplished (we expect will be), the company, then, may make a deal with Liberty to reduce Liberty’s stake in Sirius, which will then give control back to Sirius, as well as a deal that will supply the needed funds to Liberty, as the latter appears to be seeking more ownership of Charter Communications (CHTR).  And that will take cash.

And since Liberty controls Sirius’ board of directors, the fix is in for an attempt to aggressively raise the share price of SIRI, through the retirement of ever more shares outstanding.

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