You probably snickered when you heard that Sirius (Nasdaq: SIRI ) was hitting up Morgan Stanley for a $250 million senior secured term loan earlier this week. The debt-laden satellite radio provider taking on more liabilities is like:
A. A leaky boat taking on a delivery of bottled water.
B. A recovering quadruple bypass patient stopping at the Burger King drive-through for a Triple Whopper on the way home.
C. Hugh Hefner filling out an online dating application at Match.com.
D. All of the above.
BUZZ! You're wrong. The right answer is, of course, "E. brilliant," but you were too impatient to let me finish the question. Then again, impatience and investing in Sirius go hand in hand. With average trading volume of 35 million shares a day, the typical speculator is holding onto the shares for less than two months.
So let that be a lesson to the trigger-happy inve ...
Brilliant? Did I really call the move brilliant? I did. Let me explain why.
The Mel-Tale heart
Sirius doesn't need the money. Losses are narrowing. The cash burn is slowing. The proposed merger with rival XM (Nasdaq; XMSR), if somehow cleared, would produce even more operating efficiencies.
Does taking out a new loan that doesn't need to be paid in full until 2012 give the company more breathing room? Yes. Pushing out maturities is the equivalent of upgrading to a larger leaky boat, asking for a side salad instead of fries with that Triple Whopper, or Hef trying online dating for his clone's sake.
However, I think it's a brilliant move because it helps fortify Sirius in the likely scenario that the XM deal is killed by the FCC, the FTC, or the ATRA. (I made up the last one, unless there's actually an Angry Terrestrial Radio Association out there.)
Theories of the "general corporate purposes" of the newfound money are plenty. XM and Sirius recently hired seasoned lobbyists to help grease the pipe dream of a union into reality, and that's always a pricey lubricant. CNN's Paul R. La Monica suggested as such yesterday in explaining the panhandling, but I'm thinking bigger.
Organic growth is an artificial reef
Keep in mind that shares of Sirius are trading for less than $3 apiece. If the company has dreams of beefing up its programming or making tactical acquisitions, greenbacks have to be the legal tender of choice.
Can Sirius really be thinking about scoring content and corporate acquisitions? When it still has its hands full with top salary deals with aural magnets like Howard Stern and the NFL? When it's already got the mother of regulatory hurdles to clear in swinging its combination with XM?
You bet. Let's step into Sirius CEO Mel Karmazin's shoes for a moment. Fancy shoes, aren't they? He's running the faster growing satellite radio service. He has seen XM suffer through a publicized outage and make the terrestrial mistake of alienating its fan base by suspending one of its marquee draws.
If the deal gets squashed -- and deep down inside you have to know that it will -- it will be XM that the market will perceive as the biggest loser. It's the one that was supposed to be taken at a premium. It's the one that has shown buckling knees during the courtship. So I believe that Sirius is simply arming its war chest because it knows that it's going to have to war with XM again once the deal is deader than a Backstreet Boys concert at a headbanger ball.
So where does the new Sirius greenery stand the best chance to grow? It can go after some of the terrestrial stars that have yet to make the jump to satellite, as long as buying out current contracts is feasible. If Opie & Anthony are ultimately canned at XM, bolting to an emancipated Sirius makes perfect sense.
However, more than just paying for new on-air content, Sirius can be loading up for off-air acquisitions.
With radio giant CBS (NYSE: CBS ) moving to acquire Last.fm, doesn't it make sense for Sirius to go after Internet radio and music discovery sites? If it decides to pursue Pandora or Slacker, it will have the bonus of snagging a popular music discovery website that plans to enter the portable media player market later this year.
Regulatory challenges that oppose the potential monopoly of having the two satrad players hook up are unlikely to surface if Sirius makes fortifying moves through audio websites, hardware makers, and other content distributors.
Think about it: $250 million can go a long way. Isn't that what digital audiobook specialist Audible (Nasdaq: ADBL ) is going for these days? Napster (Nasdaq: NAPS ) can be had for even less! RealNetworks (Nasdaq: RNWK ) paid $350 million for ringtone heavy WiderThan last year, so surely there are more affordable opportunities there.
If I'm right, Sirius is already looking ahead to its XM-less future. This new debt? It's just one more way to finance that future.
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Longtime Fool contributor Rick Munarriz never did learn how to make a good multiple choice test. He does not own shares in any of the companies in this story. He is also part of the
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