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Published: July 7, 2010
Borrowing billions of dollars to try to
build a business from scratch is always a bad idea. Companies
tend to under-estimate expenses and over-estimate revenues in
order to sell stock and debt at attractive rates. When investors
and lenders get wise, they tend to stop putting fresh money into
the business, often when it is only half built.
That was the ignominious fate suffered by Sirius Satellite
Radio, which was forced to merge with rival XM Radio back in
2007. That effort simply combined two money-losing entities into
one larger money losing entity known as Sirius XM Radio (Nasdaq:
SIRI).
As a quick refresher, Sirius generates the bulk of its new
customers by offering limited free-trails to buyers of new cars.
The company is also aggressively pursuing the used car market
these days. According to the Department of Transportation, there
were more than 250 million passenger vehicles on the road in the
United States in 2007. Sirius estimates that 27 million of those
vehicles have factory-installed satellite radios. About 11.6
million of those vehicles have active subscribers at the wheel,
with 15.3 million that are active radios but are not enabled.
Sirius believes that within five years, the number of vehicles
on the road with factory-installed satellite radios will grow
from 27 million to about 70 million, depending on auto sales
trends during that period.
A year into the merger, Sirius XM subscribers were beginning to
defect and debt-holders were threatening to take control and
wipe out equity investors. By January 2009, shares fell all the
way to $0.11, which usually implies an imminent bankruptcy
filing. Indeed, a $175 million bond repayment was coming due in
February 2009, but suddenly against all odds, things started to
turn around. Uber-investor John Malone showed up with a $400
million rescue package to help beat back creditors. Within a few
months, auto sales rebounded and subscriptions started to spring
back to life. (Sirius generates new customers by offering them
satellite radio in new cars).
Despite the boost, the company's customer base was still
shrinking. It lost nearly 600,000 net subscribers in the fourth
quarter of 2008 and another 400,000 in the first quarter of
2009. By the second quarter of last year, it lost another
200,000 subscribers. Subscribers were still leaving, but the
trend appeared to be reversing.
Finally, by the third quarter of 2009, Sirius changed course and
added more than 100,000 subscribers. During the next six months,
530,000 net subscribers signed on. Just this morning, Sirius XM
announced that it signed up 583,000 net new customers -- more
than twice analysts' forecasts and more than twice the rate seen
in the prior two quarters. That helped push shares up +5% in
Wednesday trading.
So is it safe to jump back into the water with this one-time
highflyer? Yes -- with a caveat. The ride ahead will be bumpy as
investors try to assess how and when Sirius can tackle it's
still-mighty debt load, which tops $3 billion.
The company faces no
major repayments
before 2011, at
which time it will
need to come up with
$340 million
(roughly the current
amount of cash on
hand), or find a way
to roll over that
debt. Another $200
million comes due in
2012, but an
eye-popping $1.8
billion debt burden
will need to be
addressed in 2013.
The sharply improved
subscriber numbers
will surely help.
Now that Sirius
looks healthy once
again, it could look
to replace that debt
with longer
maturities at lower
interest rates. And
the operating
outlook should only
improve further as
the company moves
closer to those due
dates.
As new cars sales
continue to rebound
up off of their
lows, and as the
installed base of
used cars with
installed satellite
radios grows,
Sirius' subscriber
numbers should keep
improving. Because
this is a high
fixed-cost
business model,
incremental new
revenue should fall
quickly to the
bottom line.
There are two other
factors worth
noting: First, a
five-year $500
million deal with
Howard Stern expires
at the end of this
year, and a similar
deal with NASCAR
ends next year.
Revenue and expenses
will likely be
altered by the
outcome of any
negotiations with
those two entities.
Second, Sirius lost
so much money in the
last decade that it
now has
approximately $8
billion in state and
Federal Net
Operating Loss (NOL)
carry-forwards.
Those NOLs could be
a substantial asset
for any potential
suitor that may look
to acquire Sirius
and shield its own
profits from taxes.
Action to Take
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Sirius is clearly
far healthier than
18 months ago. When
the auto market
eventually rebounds,
growth should be
sure and steady.
The improved outlook
should enable
smoother management
of the company's
substantial debt
load. Look for
analysts to upwardly
revise their
forecasts after
today's subscriber
news. Shares trade
for about 10 times
likely upwardly
revised 2011
EBITDA targets.
It's unlikely that
shares will garner a
multiple much beyond
13 or 14, at least
while that debt
overhang is there,
but +30% to +40%
upside from here
looks attainable.
-- David Sterman
Staff Writer
StreetAuthority |
