Sirius XM Radio
Shares of Sirius have always seemed like a bit of a lottery ticket, given the company's "feast or famine" nature. Now they're simply a $1 scratch-off with some change in return.
Where does Sirius go from here? If it's smart, it will declare a reverse stock split.
Reverse splits are stupid, Rick
I hear you. Reverse splits are the handiwork of the desperate, typically enacted by companies that are trying to break their fall on their way down to zero. Issuing a split is also a zero-sum game. If Sirius declares a 1-for-20 reverse stock split, where every 20 shares would be replaced with a single new share, it wouldn't change much. The share price would go from $0.62 to $12.40, but with 95% fewer shares outstanding. In other words, the market cap wouldn't budge.
Reverse splits are also embarrassing. Growing companies love to declare conventional stock splits. It's an injection of bravado, as a hot company announces that it wants a lower share price, so it's going to issue more stock to reward its shareholders. Even in this battered market, some darlings are stepping up with forward splits. Guitar Hero-strumming star Activision Blizzard
So why should Sirius swallow its pride and go the reverse route? Do you really have to ask? Let me repeat myself: the stock closed at $0.62 yesterday. Where's the dignity in that? If you're still not sold on the merits of a reverse split, let me offer three compelling rationales:
1. Quality companies resort to reverse splits, too
Obscure stocks on an inevitable one way ride to Nil City aren't the only reverse-split alumni. Sun Microsystems
2. Consumer-facing companies need the illusion of solvency
It's so tempting for Sirius to declare bankruptcy. That move would likely wipe out the common-stock shareholders, but it would be a compelling way to restructure its burdensome debt. However, most consumers -- including Sirius and XM's 18.6 million subscribers -- don't know the difference between Chapter 7 and Chapter 11 bankruptcy protection. Subs hear the word "bankruptcy," and they cancel in droves. Potential signups hear "bankruptcy," and there's no way they'll fork over the money for a satellite radio receiver. By the same token, how can a penny-stock share price not create a negative perception of Sirius? Consumer-friendly firms like Six Flags
3. Penny stocks have an uphill battle in tapping equity markets for capital
Sirius is in a bind. It has three massive debt repayment deadlines next year. If the market were kinder -- and its stock were trading higher -- Sirius could likely land a top-shelf underwriter to roll with a secondary stock offering, filling the company's coffers with enough cash to pay off its creditors. But when your stock is down to $0.62 a stub, the company's fundraising options dwindle to bake sales and car washes. Trust me, you don't want to see CEO Mel Karmazin in a wet t-shirt.
The audacity of nope
Some will argue that Sirius doesn't need a reverse stock split, that it's capable of clawing its way into double-digit territory on its own. I don't buy it. The company has more than 3 billion shares outstanding after completing its hookup with XM. What's the likelihood that Sirius commands a market cap greater than $30 billion over the next few years?
It's just not going to happen. The company is still at least a couple of years away from profitability. All 10 of the major analysts following Sirius XM see another deficit next year. The softening economy finds Sirius offering discounted pricing plans next month, and expecting lukewarm subscriber growth for 2009.
A higher share price would spur greater confidence, but Sirius XM can't create that on its own. I hate to say it, but Sirius needs to declare a reverse stock split.
And it needs to do so before time runs out.
Reverse the clock for related stories:
Priceline and Activision Blizzard are active recommendations for Stock Advisor subscribers. Learn more about the stocks -- without having to split in any direction -- with a free 30-day trial subscription.
Longtime Fool contributor Rick Munarriz knows that you can't turn back time, but you can take back shares outstanding. He does own shares in Six Flags and Jamba. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. If it could turn back time, the Fool's disclosure policy would take back those words that hurt you, and you'd stay.
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