Is There Really Nothing for Sirius XM to Buy?

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"There is nothing -- zero -- out there that I want," Sirius XM Radio (Nasdaq: SIRI  ) CEO Mel Karmazin told Jim Cramer on Mad Money two weeks ago.

Karmazin was talking specifically about the acquisition opportunities for his company. The satellite radio operator is at the point where it's generating healthy sums of free cash flow. There are restrictions on the debt that it can repurchase, so the company is down to just a few realistic options.

  • Sirius XM can pay out a dividend. The only rub here is that there is the equivalent of 6.5 billion shares outstanding. Even declaring a stress-test-busted banker's quarterly payout of $0.01 a share would mean shelling out $260 million a year. Sirius XM can afford it, but not much else. Yes, its guidance calls for $875 million in adjusted EBITDA this year, but that's before the more than $300 million it has to pay out in interest on its more than $3 billion in long-term debt.
  • Buybacks are always an option. It can even see if it can begin buying back the 40% preferred share stake owned by Liberty Media (Nasdaq: LMCA  ) . The problem here is -- once again -- the 6.5 billion shares outstanding. There is only so much nibbling that Sirius XM can do here. When your market cap is $15 billion and your enterprise value is more than $17 billion, it will cost a lot of money to move the needle here. There's also the real possibility that Liberty Media is looking to increase its position instead of cashing out.
  • Cash is great. There's nothing wrong with sitting on money as it trickles in. Sirius XM would simply be saving for a rainy day.
  • Sirius XM can go shopping, acquiring companies that would help it improve its offers.

Sirius XM is leaning toward the second option, though it's really the fourth one that it should be considering.

Checking off Sirius XM's empty shopping list
Karmazin has made it clear there is "nothing" he wants to buy. It's a pity. Sirius XM has billions in net operating losses that it can use to offset future earnings. Clearly this will come in handy now that Sirius XM is profitable itself, but it will take several years -- and perhaps closer to a decade -- of growing profitability before it exhausts its tax breaks. Wouldn't shareholders be better served if it can speed up that utilization by acquiring profitable or near profitable companies?

It's easy to see why Karmazin is hesitant.

What's growing in radio? Sirius XM's top-line growth has slowed in recent years -- making it more of a bottom-line growth story -- but terrestrial radio is having an even harder time reclaiming its glory days.

Internet radio is growing quickly, but where's the profitability that Sirius XM would need to cash in on the tax advantages of its own prior losses? Pandora (NYSE: P  ) turned heads by posting back-to-back quarters of better-than-expected profitability, but its most recent quarter was a red-inked dud.

There are plenty of popular digital music services beyond Pandora these days. Spotify, MOG, and RDIO come to mind. CBS' (NYSE: CBS  ) has gone through a couple of strategic changes, making it possible that CBS would consider handing over the dot-com streaming site at the right price. CBS has never been shy about shuffling its deck of properties. However, we don't know the financials behind any of these companies.

Sirius XM can help, of course. Sirius XM ownership would naturally raise the awareness of these non-Pandora brands. The satellite radio company can also use these music sites as test labs, getting a good read on what music is truly trending, improving the quality of its own playlists. Sirius XM can also turn to site listeners as the ideal target audience to market its namesake premium radio service.

There's an app for that
If there is an area where Sirius XM can probably find a few things worth buying, it would be in mobile.

Sirius XM made a big splash when it introduced streaming as a stand-alone service to Apple (Nasdaq: AAPL  ) iPhone and Web-tethered iPod touch owners three years ago. The company boasted that it had received a million downloads shortly after releasing the program, and versions for other smartphone operating systems would follow.

However, streaming isn't something that Sirius XM has been boasting about these days. Sirius XM never did tell us how many of those Apple App Store shoppers actually bothered to check out the free trial -- or, more importantly, how many of those stuck around.

As of this afternoon there were 13 free music-related downloads that were more popular than Sirius XM. Only one of them -- the application for music video specialist Vevo -- has a lower rating (and that's because it now requires folks to have a Facebook account to log in).

The Sirius XM app isn't garbage. Most of the negative reviews come from people downloading the "free" program -- only to realize that it is certainly not a free program. However, Sirius XM can use a little more skin in the mobile space.

Whether we're talking about song recognition apps by Shazam and SoundHound or popular streaming platforms TuneIn Radio and Slacker, there are some interesting buying opportunities in mobile.

Sirius XM has the money. Karmazin told Cramer that he expects the company to have as much as $1.5 billion of cash on its balance sheet by year's end. Oh, and remember -- Sirius XM doesn't have to make all-cash transactions. Its strong stock performance over the past three years would make it attractive legal tender.

Either way, Karmazin shouldn't settle for buying "nothing" when it's really simply a matter of looking around until he does indeed find something.

Running of the bulls
I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.

XM Satellite Radio was a Rule Breakers recommendation before the Sirius XM merger. It's now gone from the scorecard, but if you want to discover the newsletter service's next rule-breaking multibagger, a free report reveals all.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Liberty. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 19, 2012, at 5:37 PM, DR1P wrote:

    "Its strong stock performance over the past three years would make it attractive legal tender."

    Although there is some validity to that statement I have two thoughts.

    1. With all of the shares that are currently out you're advocating issuing more?

    2. If more shares were to be issued out, that would require Liberty's approval since they have a number of board seats. I doubt that Liberty would approve since issuing more shares would result in them owning a smaller percentage of Sirius XM.

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