By Relmor Demitrius
Sirius XM Radio may have spilled the beans again in their quarterly filings. As is often the case with companies, a careful read of their annual report can provide many clues and hints to future plans. Sirius XM’s annual report filed on February 25th appears to be no exception. There are some changes from their third quarter report that are definately noteworthy.
Looking over expected cash contractual obligations from this filing, we will see there has been some changes from the November filed third quarter report. Here is what Sirius XM defined as their cash contractual obligations for the coming years on this current annual report. These would be cash expenses that have been well planned for, consistent, and very much a part of their operating structure. These assessments have proven in the past to be accurate and helpful in projecting their results. So these figures are definitely to be respected.
From the 2009 Annual Report From February of 2010:
(15) Commitments and Contingencies
| 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||||||||||
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Long-term debt obligations
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$ | 513,882 | $ | 349,080 | $ | 239,402 | $ | 1,304,250 | $ | 555,260 | $ | 257,000 | $ | 3,218,874 | ||||||||||||||
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Cash interest payments
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263,358 | 249,642 | 234,037 | 194,849 | 63,814 | 25,058 | 1,030,758 | |||||||||||||||||||||
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Satellite and transmission
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182,443 | 58,460 | 2,359 | 2,370 | 10,856 | 11,327 | 267,815 | |||||||||||||||||||||
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Programming and content
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253,471 | 143,187 | 123,925 | 32,478 | 14,350 | — | 567,411 | |||||||||||||||||||||
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Marketing and distribution
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68,565 | 25,048 | 18,559 | 6,950 | 4,500 | — | 123,622 | |||||||||||||||||||||
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Satellite incentive payments
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7,384 | 8,851 | 10,505 | 11,099 | 10,807 | 63,535 | 112,181 | |||||||||||||||||||||
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Operating lease obligations
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38,465 | 23,614 | 19,430 | 15,612 | 9,877 | 5,751 | 112,749 | |||||||||||||||||||||
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Other
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31,496 | 6,503 | 1,515 | — | — | — | 39,514 | |||||||||||||||||||||
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Total
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$ | 1,359,064 | $ | 864,385 | $ | 649,732 | $ | 1,567,608 | $ | 669,464 | $ | 362,671 | $ | 5,472,924 | ||||||||||||||
This is from their report in November of 2009.
(15) Commitments and Contingencies
The following table summarizes our expected contractual cash commitments as of September 30, 2009:
| 2010 | 2011 | 2012 | 2013 | Thereafter | Total | |||||||||||||||||||||
| Long-term debt obligations | $ | 13,742 | $ | 407,889 | $ | 239,541 | $ | 1,804,406 | $ | 812,260 | $ | 3,363,584 | ||||||||||||||
| Cash interest payments | 304,935 | 295,019 | 276,326 | 244,049 | 88,871 | 1,274,838 | ||||||||||||||||||||
| Satellite and transmission | 98,933 | 106,834 | 36,659 | 2,370 | 22,183 | 301,664 | ||||||||||||||||||||
| Programming and content | 257,126 | 147,529 | 129,236 | 38,638 | 29,955 | 690,114 | ||||||||||||||||||||
| Marketing and distribution | 43,666 | 24,868 | 14,533 | 3,000 | 4,500 | 142,096 | ||||||||||||||||||||
| Satellite incentive payments | 7,384 | 8,851 | 10,505 | 11,099 | 74,342 | 113,982 | ||||||||||||||||||||
| Operating lease obligations | 37,352 | 22,851 | 18,861 | 15,046 | 14,854 | 122,302 | ||||||||||||||||||||
| Other | 34,096 | 20,677 | 8,234 | — | — | 79,328 | ||||||||||||||||||||
| Total | $ | 797,234 | $ | 1,034,518 | $ | 733,895 | $ | 2,118,608 | $ | 1,046,965 | $ | 6,087,908 | ||||||||||||||
The most significant difference of note is in the long term debt obligations for 2010. There is a huge change. It has gone from 13.7 million to 513.8 million. This is a change of just over 500 million dollars.
Next notice that 2013 long term debt obligations dropped in the new filing from 1.8 billion to 1.3 billion. The difference is around 500 million dollars.
The total debt obligations has remained unchanged however.
Cash interest payments are dropping 40 million dollars in 2010. It was planned on being 304 million and is now projected at 263 million. 40 million in interest payments being removed from 2010 would match up to removing 500 million in debt. So this works out nicely. Looking over the total payments for all years it would seem Sirius XM is now projecting paying around 178 million less dollars in this category. If you will notice their expected cash interest payments in the years 2010 to 2013 have all dropped. 2014 and beyond are unchanged.
There also seems to be other items in 2010 receiving more cash payments and the difference is noticeable in fewer payments in later years.
The next line is for satellite and transmission costs. This covers the costs to build new satellites, insure the launches of these satellites, and costs to upgrade repeaters and other transmission expenses. They amended this line item for 2010 up from 99 million to 182 million. This is a 83 million dollar increase in payments to this expense for the year 2010. As expected then, in subsequent years the payments drop. What was expected to be 106 million dollars in 2011, is now 58 million. As overall payments haven’t changed, it seems Sirius XM has simply decided to move up payments on this debt, more likely to reduce interest going forward.
The next line item is programming and content. The only significance of this line item is that overall, Sirius XM is expecting 35 million fewer dollars to be spent on this item in the coming years than was planned only 3 months ago. This could be due to expected cost savings on future talent contracts or dumping dead weight like Oprah Winfrey. These are a few of the things they may be implying here. What is also of note, is that the 100 million a year to fund Howard Stern is either still being budgeted for him, or they are still intent on spending it on replacement talent elsewhere. This shows the huge advantage of having a CEO like Mel Karmazin, who knows that the one thing you don’t skimp on in the radio business is content and talent. Terrestrial radio tried this to disastrous results and why Sirius XM is so strong today.
The next line is marketing and distribution. The new filing is showing an increase in spending on this item, with a large increase coming in 2010. 91 million was expected to be spent, now they are expecting 123 million. This is an increase of around 31 million dollars. If they budgeted this amount 3 months ago, why the huge change? Maybe because more cash is about to become available.
Other line items are relatively unchanged. Now that we have gone over the changes, let’s make some observations.
Sirius XM has increased their projections on cash expenditures in 2010 by around 595 million dollars. So from November of 2009 to February of 2010, they have added 595 million in cash payments that were not being allotted for before. With 383 million dollars in cash on hand, and a very tight cash flow, sure they are positive, but not by 600 million a year, this seems impossible. With my calculations showing Sirius XM will have a nice year in the cash department if they grow their cash on hand to 525 million total, even if at the end of the year these new changes were executed, there would still be a huge drain on cash, and put cash on hand well below what is considered good business. Since we know Mel Karmazin thinks holding cash is important, and he probably has bond covenants that require a minimum cash holding, and never wants to be caught without cash on hand again, these increases in cash spending are impossible to rationalize within their existing 2010 cost structure. So where will this added cash come from?
That seems to be the question here. With these facts before us, we can begin to formulate an informed and logical observation. Sirius XM is about to add a large amount of cash in 2010. This is undeniable if these numbers are true, and we really have no reason to assume they aren’t. It appears that debt from 2013 will be paid off, as we can see long term debt obligations from cash were removed from 2013, and almost to the dollar added to 2010. Since overall debt due is unchanged, they did not add on new debt to obtain this money. Nor was existing debt extended. Which of the 2013 debt are they going to remove? If partial removal of debt wouldn’t be possible here or likely, then the exact price of debt matching best would be the 500 million 9 5/8% interest notes from 2005.
When calculating the interest saved by paying this debt off in 2010, this interest rate also worked best in that equation.
Sirius XM appears to be spending more than just a 500 million dollar increase in 2010. Other 2010 line items are going up as well. They may have decided to use some cash on hand to add to reducing future payments on interest, for instance by paying more satellite costs now, rather than later. So these increases could be explainable to new cash added during 2010. It seems possible with these facts that even more than 500 million in new cash is coming in this year. Since it wasn’t a bond sale, what are the options? And why did Sirius XM do this. First the why.
The why is right on the bottom line. The numbers say it all. In the revised report, Sirius XM is now expecting to save over 258 million dollars going forward. So by spending 600 million more dollars in 2010 than before, they will save 258 million dollars later. So this a great use of cash, and nice relief to their balance sheet. With a company where every dollars is important right now, this is a huge move for their future. And this is just one move too. Sirius XM doesn’t have to be done here. Now let’s look at what could have allowed them to access 500 million or more cash in 2010. I will now speculate using facts to determine where this money may come from.
Sirius XM may be offering a preferred stake increase to Liberty Media. Liberty is hungry for debt of this company, as Sirius XM is reporting that Liberty now owns over 250 million dollars in total Sirius XM bonds. They have stated they will probably never convert their 40% stake, but would be interested in adding more. At a nice premium of over 1.30 a share, why not give Sirius XM some much needed interest relief, boost their marketing cash to pay dividends later, pay more of satellite costs now, and pay down long term debt while receiving around the same price for shares if they tried to buy them on the open market. They keep it preferred shares as they like it, and Sirius XM gets a huge cash infusion. With Sirius XM giving away shares for debt in December of 2008 for 20 cents, 15 cents etc… , getting 1.30 now for the equity is a great deal for them. When you receive 40% for free, adding another 4.9% (there maximum allowed ownership levels at this time), at 1.30 or 1.50 per share is nothing for this company’s historic trading range and current market cap. I think signs are possible that Sirius XM may even get more per share than this. They are adding 600 million in payments to 2009, so if we assume all of the new money was used immediately, as cash should be used you don’t need, then its possible they may have gotten even a higher price. If you take how many shares would be needed to get Liberty to 49.9% right now it would be around 370 million shares. So take 600 million dollars and you would be around 1.60 a share. Buying 49.9% of Sirius XM for 1.60 a share is a great deal for Liberty Capital (Nasdaq:LCAPA), which owns the stake for Liberty Media. LCAPA stock would go up on the announcement, Sirius XM stock would go up on the announcement, and Sirius XM now has a much nicer balance sheet. Liberty Media just freed up 4 billion dollars in cash, and Liberty doesn’t usually go into cash to sit on it. Maybe this is one possible use for this cash.
Sirius XM could be doing a stock offering or a debt for equity swap. This is unlikely, as a stock offering would be more dilusive, as any shares issued would need to have 40% added to them and held in outstanding if Liberty were to convert their holding. So this could be what they do. There are advantages to both. With the preferred shares, they will probably never enter the float, and they are in stable hands with an expert in the subscription based business model, looking to expand globally. With issuing common shares for debt, you can get this stock entering back into the market almost immediately, and you further dilute yourself as Sirius XM with Liberty sitting back with their 40% stake regardless of how many shares you issue. So if they did sell shares, I would hope they get a nice price for them at least, and the holder is an investor. The advantages of common versus preferred, is that the common stock sale would be for actual shares and not ownership percentages regardless of dilution, where as the preferred shares are not. So it would be for 4.9% of the float right now, not 4.9% of the company ownership. Common stock can be bought by the company and destroyed, where preferred shares cannot.
Sirius XM could be selling content rights. As has been reported on this site for months, Liberty Media and Sirius XM are in plans to provide satellite radio on an international scale. Liberty will need content. Sirius XM has plenty of content, satellite radio expertise, and deals with every major car maker. They have contacts within music and radio, and have compatible technology with Liberty Media’s recently acquired World Space Assets (OTC:WRSPQ). So this explanation might make sense too.
Sirius XM could sell assets. This is possible, but I would begin to wonder what assets exactly, and what is the wisdom in doing this. Not even sure this is a viable explanation, but it is within the realm of the facts presented.
There are other possible explanations, but the first two are the most reasonable. Since I wouldn’t expect all these cash obligations to be paid out at the exact end of the year, and it is already March, I would expect something of this to come within a short period of time. It could be days, or it could be months. Not sure, but as the numbers are suggesting, something is definitely in the works.
Rel,great article and would just add that Liberty can aquire no more than 49.8% of common,so prefferred if done would be amended to be worth 49.8% with cash infusion,so SXM is getting back those Liberty prefferred shares after all,but just to issue new ones at a greater conversion rate and the company gets a premium on shares and saves alot of future money on interest draining cash in operations..
Keep up the good work..i would also note a thanks to Cos and Steiny for noticing this and bringing it up,about table in filing..
Relmor,
The 4billion in cash was taken in at Liberty Global, I would doubt that that money is interchangeable with Liberty Capital.
Rel,
Another top notch article. Very nice explainations, too. The articles here, are simply unbelievable. If there ever has been one source to go to,you at KOAT – are it. I cannot thank you enough.
2010 is going to be very, very good…..and exciting.
If this is such good news — and it sure appears to be — then why wasn’t Mel shouting it from the rooftops? Hell, a press release over the weekend about it would surely have kept us over a buck Monday and Tuesday.
Thanks for sorting through this, Relmor. And thanks to Steiny and cos for getting the ball rolling on the weekend thread.
A very sound article with several possible reasonable scenarios. You put SW to shame.
Is it possible that they will have more cash on hand because they are not going to renew howard stern’s contract?
Wrong line item. No. And not even close to enough money.
Very interesting article Rel. Based on Mel’s comments, personally, I think the option to sell content is the most likely option based on Mel’s remarks. Lots of talk recently about forming some kind of partnership with Liberty by providing content. Also, I don’t see issuing shares as a likely option since Mel has said that he will do what’s in the best interest of the shareholders. I don’t see that as being in the shareholders best interest…at least short term. Finally, he has stated that refinancing when possible on more favorable terms would be done where possible. With recent credit upgrades, seems to me that they may be about to announce a refinancing deal. I certainly don’t see Mel using cash since he has said he will never get cash short again and they are just now starting to improve their cash position. No doubt though something is about to occur…and great catch and kudos to you, Irish, Steiny and Cos on figuring all this out. This is a great site to get timely, real and relevant information. Thanks for your dd and excellent articles.
Relmor
Outstanding work my friend…I think that you have your bases covered…I honestly believe that one of these scenerios will play out in the near future. Cos, Steiny, and Irish need kudos as well. Very Nice work!
Boomer, I agree with your analysis more. While relmor makes some good speculations they are just that. I dont think selling content to Liberty will happen anytime soon and not only that they will get nowhere near that much for it. relmor, You dumb twit do you even know what SIRI and XMSR of Canada pays for their content? I got news for you it is not even close to 200 million a year, much less 500 million, and as a matter of fact those payments are being defered, so they really are not paying anything for it NOW (well NOW they are starting to).
So like Boomer said if you see anything then it will most likely be a refinancing deal to push 2013 debt back even further at a more reasonable rate. There also would have some of what relmors OTHER point was which it would be selling bonds which would need shares loaned out at some low excise price to get a lower interest rate. I think what relmor missed was the THEREAFTER part of that report which shows a increase of guess what??????? Yes about 500 million.
Ho,numbnuts,you better go back and look at those 2 tables again,one is 3Q ending 9/30/09 and other is 4Q ending 12/31/09…one has 2014 and then thereafter,other has only to 2013…it is saying paying off 500 mil in debt,ot refinacing or pushing out debt,in fact it says moving up and paying off 500 mil sometime this year..rest of what you said i can make snense of what you are saying,….lol
When your own post is 100 percent wrong John, I wouldnt be quick to attack. Ill let you wonder why your wrong. If you want the answer come into the forum.
Ill give you a hint….
There are thereafters on one report, and there are thereafters on other reports. Seems the littel trick sirius xm did here fooled u.
P.S. Just so you know, I was being sarcastic about being in agreement with Boomer.
Extremely interesting article and very plausible scenario being presented. There appears to be no doubt that the companies will be working closely together in the future. Thanks for the great detective work on our behalf.
They can call back the 2013 bonds and refi at a lower interest rate, (as well as pay a fee for calling them back this month). It’s also possible to push them out further as Mel said to the earnings call question, it’s also possible he could issue fewer bonds.
On the other hand. Since he changed the schedule from 3 months ago, he can change it again.
Rel, very nice – Keep it up!
Rel…refinancing comes at a price. The 2010 numbers for partial payoff of a 2013 debt could what we are seeing as well!
PS….DAMN fine article!!!!
Relmor… my hunch with regards to the debt…
2010 increased by $500MM, while 2013 decreased by $500MM. Plus 2011 decreased by about $58MM… while 2014 was added, showing around $555MM.
What does this mean? IMHO, Sirius is going to add a new bond issue for around $550MM — and used the proceeds to take out approximately $50MM due in 2011 and $500MM due in 2013. With the new issue being paid this year — and maturing in 2014.
Purely speculation here. I see no notes on their debt… so something is clearly going on here. My guess, is that they are continuing to restructure their debt… just as I had hoped. I have felt that they need to continue to clean up their balance sheet before they do a stock buyback… and I think this is exactly what we’re seeing. I would not be surprised to see a new bond issue for over $500MM come out — due in 2014.
I have felt for some time that Liberty may gain the additional ownership stakes — via further debt being converted to equity with Liberty. I just don’t know if this is that case here. Could be… or maybe not. We’ll see… but I think we’re definately seeing debt being restructured here.
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homer thanks for your reply,you may not remember,but that 58 mil in 2011 was paid of by xm in 3Q as reported,it was the PIK notes,if you see in 4Q table it is deducted..My spec here is based on this table is a contractual commitment of cash for 500 mil in debt previously due in 2013 and only bond is the 500 mil 9 7/8 siri notes that equal that.but in the annual 10-k as you know they adoptedthe accounting rule of reporting any material financial agreements entered into after q ends being reported and the auditors and independent board memebers have to sign a statement saying there is none that would affect this 10-k,so you can see it is perplexing,as of 2/25/10 they signed it and no agreement,yet it’s in 10-k with no news or filing about paying off debt..iknow they don’t have to file to pay off debt,but cash commitment is different..
No, Homer, that is not possible. There is no increase to long term debt obligations from 2014 and after. This is not being extended, its being removed. Hence, new money without incuring more debt , hence the options i gave in the article. This is of course assuming this is correct what sirius put there.
Regarding CAPEX?
I believe I found that Sirius is also launching FM-6 here in 2010 now — in addition to XM-5 going up, which had been planned for some time.
Instead of just XM-5… you add in Sirius FM-6 and you’re adding $80-100MM to CAPEX. Recall that FM-6 had been planned for 2011. Since it’s going up this year, that is the answer to the increase in CAPEX.
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Johnny & King… thanks for the responses. That’s what I get for jumping quickly to an opinion, without studying the numbers (I was too tired).
Yep, I did forget about the $58.8MM purchase of the PIK Secured 2011′s. The drop in 2011 commitment is almost exactly $58.8MM. Meanwhile 2012 remained relatively unchanged. But 2013+ did drop significantly… as was pointed out. In fact, the 2013 commitment dropped $500.1MM… but 2014+ remained completely unchanged at $812MM.
So my question is, as the article questions… where did that $500MM due in 2013 go? Meanwhile, why did 2010 go up by almost exactly $500MM? Obviously, the two are probably related — I believe that they’re looking to restructure more debt. I’m with you that it appears that they’re taking $500MM due in 2013 and paying it off in 2010. So where is that money coming from?
I believe that we’ll see a new $500MM bond issue floated sometime this year – with the funds from it being used to repurchase $500MM of one of the 2013 maturities. Which one? They have $500M in “9 5/8% Senior Notes due 2013”; and $525MM in “11.25% Senior Secured Notes due 2013; plus $778MM in “13% Senior Notes due 2013”. With Sirius XM slowly nearing investment-grade status… being able to take the interest rate down by 2% annually, would save the company on annual interest payments, as well as push out the maturity to 2015 or later. This also eases the burden of dealing with nearly $2BB in maturing notes in 2013.
As I said, restructure current debt is key – and what I want to continue to see as an investor, before share buybacks.
While I still think it possible that Liberty may trade some of the Sirius and XM bonds they hold for more equity – I don’t necessarily agree with them getting more preferred shares in exchange for a cash infusion. I mean, based on current valuations… if they were given the maximum 9.9% additional ownership that they are allowed, for $500MM, they would be getting those shares for essentially $0.39/share. If they were given 5.0% additional ownership, for $500MM, they would be getting those shares for essentially $0.84/share. At the current pps of $0.96, for $500MM, I estimate that they’d be able to up their stakes to about 44.5%.
But again… I see Liberty doing more of a debt exchange for equity, or even a tender offer for common shares – than I see them investing $500MM cash for a small increase in ownership stakes.
As of 12/31/2009, Liberty was holding $279MM of various Sirius and XM bond issues.
I’m looking for Sirius XM to issue a new $500MM bond to raise cash for a restructuring of 2013 Notes – and wouldn’t be surprised to see Liberty be a buyer of some of those bonds.
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Sirius reported 3,884,668,860 shares as of 2/23/2010. If this 60%, then Liberty’s 40% is approximately 2,589,779,240 shares.
Option #1: For Liberty to get it up to 49.9% by buying current common shares – then they’d need to get it up to 3,230,749,601 shares… which means by buying 640MM shares, either on the open market or via a tender offer. Regardless, if they go this route — Sirius gets zero money from them for that ownership.
Option #2: If Liberty wants to get to 49.9% ownership through debt for equity swaps, or by peferred equity for cash swaps – as you suggest – then they’d need to up their ownership to 3,869,161,199 shares (because the number of outstanding shares will increase). Which means adding preferred or converting debt that is convertible into common. They will need to add 1.279BB shares this way, because the outstandning sharecount would increase to over 7.7BB shares. IMHO, $500MM is not enough to do this. Current valuations suggest that it will cost Liberty well over $1.2BB to get enough equity going this route… and that’s with no premium. Which means, for any significant amount of increased ownership – either Sirius will have to give it to them at a discount, or Liberty will have to invest a lot more than $500MM. Of course the benefit here is that Sirius DOES get cash this route – or gets debt reduction. But the problem here is that – this isn’t a typical move for Liberty… option #1 is.
That is why looking at the moving around of cash commitments tells me we’re looking at a new bond issue…
PS – Liberty can buy up to 9.9% additional ownership. Whether it be convertible preferred equity or common shares. They are not limited to 4.9%. If they buy common… in order to reach the 49.9% max, they need to buy 9.9%.
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Ok you basterds you take one mistake at the end of the statement and jump on that, I will agree that was my mistake but it still does not change the rest of the statement and that for the most part it is most likely the case.
Wow, tremendous article and comments throughout!!!