1.25 Billion Reasons to Buy Sirius XM

Sirius XM Radio (Nasdaq: SIRI  ) is taking advantage of low rates to raise a lot of money. It's easy to see what the company is going to do next.

The satellite-radio provider announced today that it entered into a five-year senior secured revolving credit facility with access to borrow a cool $1.25 billion. Sirius XM isn't tapping the line just yet, but it did point out that the funds can be used for working capital and other general corporate purposes that include share repurchases, dividends, and the financing of acquisitions.

Repurchases? Dividends? Acquisitions? Only one of those three options makes sense -- and it's not the trendy push for dividends. Forget acquisitions, too. Sirius XM has repeatedly pointed out that there are no attractive buyout candidates that would move the needle.

Pandora (NYSE: P  ) after its 17% plunge is interesting. Its market cap has dropped to nearly the amount of Sirius XM's new credit line. Pandora's problem all along has been getting its 59.2 million active users to pay up as premium accounts, and that's something Sirius XM excels at. But there won't be a buyout. Sirius XM's stock would take too big a hit to even consider the logical synergies.

Dividends? Sure, Costco (Nasdaq: COST  ) recently agreed to take on $3.5 billion in new debt to bankroll a $3 billion distribution. However, something tells me Sirius XM doesn't want to take on new debt with nothing to show for it after the fat checks have been cut. Besides, even if it were to distribute the entire $1.25 billion, would investors really want the small $0.20-per-share one-time dividend given the roughly 6.5 billion shares outstanding?

Besides, the clock is ticking. There's no point in declaring a special dividend after tax rates shoot higher on qualified dividends come January, and there may not be enough time to get it done in December.

That leaves us with stock repurchases, but even they may not happen right away. We're still waiting until Liberty Media (Nasdaq: LMCA  ) receives regulatory approval to take majority ownership control of the company. After that happens, being armed with funds to make aggressive buybacks will be useful if Liberty Media spins off its stake to shareholders. Snapping up stock in the open market would be a smart way to counter float glut.

So don't wait up for a special dividend or an acquisition spree. This credit line will be tapped when the moment is right to begin returning money to stakeholders in the form of stock buybacks.

It's an easy bet.

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Read/Post Comments (5) | Recommend This Article (5)

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  • Report this Comment On December 06, 2012, at 9:07 AM, leaderoftheback wrote:

    Good Grief, Rick- this looks like the riskiest buy on the planet. Looks like a publicly owned leveraged buyout, where management takes dividends and heaps debt on shareholders. Of course, with insider ownership at 38%, maybe it IS like a traditional heaping of debt on shareholders because 38% of that $1.25B "benefit" will accrue to those insiders...take the money and run!

    The company has a gajillion shares outstanding, doesn't make any money, has debt up the wazoo...

    How about this scenario: a year or so from now, SIRI finally pulls the trigger and does a reverse split, say 20:1. That should trim 20-30% off the share price just because that's what happens with reverse splits (or much worse, of course). There is just no clear path to growing cash flow without some debt reduction and no per share profitability without a reverse split. How long can anybody wait for real EPS progress?

    Disclosure- I do not follow SIRI closely, just noting what's on the Bloomberg wire and seeing what the Fool mavens have to say...so I could be COMPLETELY wrong!...but I bet not (but not with real money, fwiw).

  • Report this Comment On December 06, 2012, at 9:51 AM, TzingerToo wrote:

    Sirius-XM has over $4 billion on the balance sheet as "intangible assets and goodwill." I'm not certain how that affects valuation but it's an awfully large number as a percentage of total assets. Certainly, any "book" valuation number has to discount this number.

    I think the company now has a viable model for gaining subscribers and growing revenue but how does a value-investor understand this?

  • Report this Comment On December 07, 2012, at 7:35 AM, leaderoftheback wrote:

    Goodwill and intangibles is where real assets go to die.

  • Report this Comment On December 07, 2012, at 11:47 AM, TMFBreakerRick wrote:

    Leaderoftheback, I respect your skepticism, but Karmazin was swearing off reverse splits when the stock was below $1 and threatened by exchange delisting. It's not going to declare a reverse split now.

    The "doesn't make any money" and high-debt accusations also ring a bit hollow. The company's going to generate roughly $700 million in free cash flow this year alone.

    Yes, it is one of the riskier stocks out there given its valuation, but there's a strong company in there than you're giving it credit for.

    Rick

  • Report this Comment On December 08, 2012, at 6:56 PM, leaderoftheback wrote:

    Hi Rick-n I agree that there is a strong company in there. What I argue is what it's worth. 700 MM in free cash flow is swell, but levered cash flow, not so great. Obviously the former can eventually overcome the latter, but I don't see any move to reduce the debt, which is the only way to move that needle. I submit that taking on 1.5Bb in additional debt to make a payout to shareholders is just not sensible, even if it is low cost money.

    I would re-ask my question- in your personal life; if you already had a ton of debt and marginal (at best) net worth, would it be wise to borrow a lot of money to take a super deluxe vacation? Sure, your income is likely to rise over the years, but your debt is gonna eat you alive. What if you need to fix your roof? That's not the world I'm comfortable living in.

    Secondly, with high insider ownership, 38% of the free dough goes to them. I wonder if one were to analyze stock grants and all, how much skin in the game do the insiders really have? I think they are milking the cash cow for all it's worth. The chickens in that there barnyard will eventually come home to roost.

    This one's a stinker (long term), IMHO.

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