Sirius XM Radio (Nasdaq: SIRI) has a welcome problem.
The satellite radio giant that had to turn to Liberty Capital (Nasdaq: LCAPA) for a life-saving cash infusion just two years ago now has too much money.
"We will have nearly $1.5 billion of liquidity at our disposal by the end of 2012," CEO Mel Karmazin said during last week's quarterly conference call. "We will have the flexibility to use this liquidity to grow our business, ensure a low cost of debt, make acquisitions, and return capital to shareholders."
Fluid options for healthy liquidity
The easy options in Karmazin's list would be to pay down the company's debt -- giving it lower interest expense obstacles to overcome in the future -- or to return some of that to investors through share buybacks or a dividend policy.
Shaving down its debt is a no-brainer. Sirius XM has $3 billion in long-term debt and related party debt weighing down its balance sheet. It's certainly a comfortable level of leverage for the now-profitable satellite radio giant, but why not pay that down so it doesn't have to struggle if subscriptions take a hit the next time that auto sales go limp or the economy stumbles into a recession?
Share repurchases and appealing to yield chasers with a steady quarterly dividend would be nice, but Sirius XM has a whopping 6.5 billion shares outstanding. Buybacks won't make much of a dent and distributions will be costly at the per-share level.
Then we get to the tantalizing acquisition opportunities. Snapping up smaller companies that are logical fits is a healthy part of any corporate strategy, but it's even more tempting given Sirius XM's tax situation.
Sirius XM has billions in tax-loss carryforwards after amassing an accumulated deficit of nearly $10 billion. The bottom line here is that Sirius XM will be shielded from tax liability on a good chunk of its future profits.
Sirius XM generated $109.9 million in pre-tax earnings in its latest quarter, but only had to pay $5.7 million in taxes for an effective tax rate of 5%. If it's able to acquire profitable companies it should result in larger after-tax profits than it would for other potential buyers.
Slim pickings
What if Sirius XM went on a shopping spree but the shelves were bare?
Given the evolving state of infotainment in new cars, it certainly wouldn't hurt to have a greater presence in online streaming beyond its own platform. Pandora (NYSE: P) is the obvious purchase, but it's also more than a year away from profitability -- and even that isn't a given. Pandora's market cap is also greater than all of Sirius XM's projected liquidity, but there's no harm in paying in stock if a deal may actually be accretive down the line.
An easier path may be to acquire an established platform available at a bargain price. We can cross Spotify off the list. It's too hot to settle for a buyout right now. CBS (NYSE: CBS) can probably be talked out of last.fm at the right price.
If Best Buy (NYSE: BBY) recently handed off Napster in a show of surrender, digital music subscription services may not be much of a growth area, but that would present another realm where there are bargains to be had by picking through the remnants of Napster, Rhapsody, and Microsoft's (Nasdaq: MSFT) Zune Pass.
What's hot in mobile these days? Firing up the iOS App Store finds 15 free music apps gaining more traction than Sirius XM's application for the growing number of iPhone, iPad, and iPod touch owners. We've already gone over Pandora, and Clear Channel (OTC: CCMO) has thrown too much promotional muscle behind iHeartRadio to cut it loose. Song recognition faves Shazam and SoundHound are interesting. Music video leader Vevo -- owned by a consortium of major labels -- would be really interesting.
However, we don't know how profitable any of these endeavors are at the moment.
This mall never closes
Thankfully Sirius XM isn't in a hurry. Waiting only grows its liquidity, and gives fast-growing music upstarts time to become profitable.
Sirius XM will have plenty on its plate in the coming months anyway as it rolls out Sirius XM 2.0 and institutes a rate hike in two months that should help accelerate its meandering top-line growth.
However, it's never too early to go window shopping. The last time that Karmazin made a major purchase -- orchestrating the merger between Sirius and XM that few thought would be possible -- it paid off in creating a company with a combined audience of 21.3 million subscribers and improving fundamentals with every passing quarter.
It's time for Karmazin to pull another XM out of his hat.
If you want to see how Sirius XM stands up to the stream teams, add Sirius XM Radio to My Watchlist.
