Sirius XM Radio (SIRI +0.00%) is borrowing money again. The satellite radio monopoly this morning announced its intention to raise $750 million in the form of senior notes that will come due in 10 years.
Offering new debt to income investors is old hat for Sirius XM. It has routinely made the most of its improving fundamentals by swapping out debt. There's no downside to pushing out maturities and lowering interest rates. As Sirius XM's credit rating quality improves, why not flex that muscle? However, this time Sirius XM isn't singling out any particular chunk of debt to be replaced. It is simply raising money for "general corporate purposes."
Yes, this could very well go toward Sirius XM's ambitious stock buyback efforts. The company knows that it has too many shares outstanding, which was true even before the merger between Sirius and XM doubled its shares outstanding and the 2009 Liberty Media (LMCA +0.00%) bailout included creation of a 40% preferred share stake. Sirius XM closed out the first quarter with 6.2 billion fully diluted shares outstanding. There are only a handful of companies with more outstanding stock.
Liberty Media in March withdrew its proposal to acquire all of Sirius XM to achieve a spinoff (which will be called Liberty Broadband Group), opening the door for Sirius XM to complete its purchase of $500 million worth of shares that Liberty Media converted to common stock. Sirius XM and Liberty Media announced the completion of that repurchase on Monday morning.
Raising $750 million would help offset the cost of that transaction, but it's not as if Sirius XM needs the money. It expects free cash flow to approach $1.1 billion this year. This is no longer the capital-intensive business it was during its early years. Outside of the occasional satellite deployment, this is a lean business -- something that is rare in a distributor. It has been able to keep content and programming costs down because it calls the shots. Music royalty rates continue to inch higher, but the scalable nature of its model has been more than enough to offset that line item.
As long as Sirius XM keeps growing -- and it closed out the quarter with a record 25.8 million subscribers, eyeing 26.8 million by year's end -- its free cash flow should continue to build with every passing year. Taking on some new debt at what will likely be a very low rate is smart.
