My worst stock for 2009 is the equivalent of shooting fish in a barrel, except that the barrel's been drained and the fish have stopped flopping.
by
Jim Gillies Published on January 29, 2009 - 7 comments
Sirius XM Radio (Nasdaq: SIRI) to find itself in 2009, through one of two routes. Either its cash burn, and the impossibility of meeting its massive immediate debt obligations, will push it into the embrace of bankruptcy, or it will dilute existing shareholders into oblivion if by some miracle it persuades its creditors to accept increasingly worthless stock in lieu of actually paying them back."/>
For me, "worst" translates to "uncomfortably likely to go to zero." That's where I expect
Sirius XM Radio (Nasdaq: SIRI) to find itself in 2009, through one of two routes. Either its cash burn, and the impossibility of meeting its massive immediate debt obligations, will push it into the embrace of bankruptcy, or it will dilute existing shareholders into oblivion if by some miracle it persuades its creditors to accept increasingly worthless stock in lieu of actually paying them back.
Satellite radio: simply not necessary
Satellite radio competes for my ears with my Apple (Nasdaq: AAPL) iPod and its dedicated car jack, my custom-burned CDs, and a host of new mobile applications, including Ford (NYSE: F) and Microsoft's (NYSE: MSFT) Sync. And with other automakers experimenting with putting routers in their cars that could stream free Internet radio, Sirius' competition for luxury dollars is increasing.
And satellite radio is very much a luxury. A past subscriber myself, I found my use waning in the months following a cross-country trip. As use fell, I found defending the monthly cost difficult -- and that was before the economy cratered, when luxury spending was easier to justify.
Consumer-electronics retail got whacked over the holiday season, and that meant fewer satellite radios being sold through Best Buy (NYSE: BBY). Moreover, new auto sales have imploded and look to get worse still in 2009. A key source of new subscriber growth for Sirius has evaporated at the worst possible time.
Cliche time: cash risk
Sirius' financials are a complicated mess, but we can tease out the key numbers to make the "worthless" case.
At last quarter's end, Sirius had $360 million in cash versus $3.37 billion in debt. In the most recent quarter, which included two months of XM's standalone results, the company burned $86 million of cash on operations and a further $29 million on capital spending. Assuming a steady cash-burn rate, its coffers should be exhausted sometime this summer. Of course, the XM merger is supposed to provide cost synergies to curtail cash burn, but I think it comes as too little, too late. And this ignores how much cash Sirius needs on hand to grease the day-to-day wheels of business -- we assume it's greater than zero.
To offset, Sirius is seeking to drive more near-term cash flow by increasing prices for subscribers with multiple accounts and charging subscribers for the previously free Internet feed. But free Internet radio is widely available -- think Pandora, Live365, and SomaFM. Sirius' new fees could backfire, if current subscribers in our newly frugal world balk at now paying for a previous freebie. This could also turn away prospective new customers.
It's more than just cash burn
There's also a debt sword dangling above Sirius' head. About $1 billion of Sirius' debt matures in 2009. So where will Sirius find the resources to meet these obligations? Management on the last conference call indicated that it anticipates "positive free cash flow of $1 billion in 2012." Nice, but Sirius needs that billion today.
In the current "credit closed" environment, I don't like the company's refinancing chances. Much of this debt already carries a high interest rate -- if the banks do grant refinancing requests, surely they'll demand higher recompense for their increased financial risks.
The most immediate debt matures in mid-February, and Sirius has been desperately flailing to avert disaster. Since the end of the last quarter, it's been steadily issuing shares to its creditors in return for canceling the debt. The company has repaid about $85 million so far, and the effective exchange price of equity for debt has plunged:
| Exchange Date | Principal Exchanged (Millions) | Shares Issued (Millions) | Effective Exchange Price per Share |
| 10/20/08 | $30.5 | 67.0 | $0.45 |
| 10/29/08 | $19.5 | 65.2 | $0.30 |
| 12/22/08 | $15.6 | 108.1 | $0.14 |
| 1/5/09 | $6.0 | 45.2 | $0.13 |
| 1/14/09 | $13.0 | 100.0 | $0.13 |
Sources: Company filings and analyst calculations.
There remains $175 million outstanding, due in less than three weeks. At what share price shall Sirius exchange the remainder? And what of debtholders who don't want shares? Sirius could repay with its increasingly dear cash -- but it might be easier to follow Nortel (NYSE: NT) into bankruptcy as a company with significant cash but substantially more significant near-term debts.
Copyright © 2008 Universal Press Syndicate.
The company may indeed go
The company may indeed go bankrupt, but I love the product. Can't stand the nonsense on FM radio. FM radio is what is valueless.