During the last few weeks more questions than answers have emerged regarding Sirius XM radio and its actual value in terms of market cap as well as share price. A look at past valuation when the two companies were separate rivals and competitors as XM satellite radio and Sirius satellite radio looking for a larger share of audience may give us some clues as to why there is so much diverse opinion regarding the merged entity as it is currently valued.
I pulled two random research reports: one for XM satellite radio from CRT Capital Group LLC dated May 1, 2006; and one from Anderson & Strudwick dated May 10, 2007 for Sirius satellite radio. Before I go into the reports, it is important to note that the merged entity of Sirius and XM is currently valued at a market cap of 3.6 billion dollars with a closing share price of .92 cents as of Monday July 19th 2010 on the NASDAQ market. The company had risen as high in terms of market cap as 4.6 billion dollars with shares reaching $ 1.20 in price earlier this year.
Let’s start with Anderson & Strudwick’s 2007 research report, which came after the merger announcement. Sirius was carrying a 4.1 billion dollar market cap at the time with a share price of $2.84 and looking forward, Anderson & Strudwick placed an $8 price target on the equity. Below is an excerpt from that report;
“SIRI appears to be headed towards one of two scenarios: either they merge with XMSR, or, DOJ/FCC blocks the merger. Should the merger get regulatory approval we would expect investor demand for SIRI’s, and XMSR’s, stock to increase as Wall Street begins to focus on cost and revenue synergies between these two companies. Some Wall Street analysts estimate the synergies between these two companies could be between $3 billion – $9 billion. The multi-billion dollar question is will regulators in Washington DC approve the merger. Given politics inside the beltway of Washington DC, we suspect the answer will be heavily influenced by the lobbying efforts from both pro and anti merger proponents. While Mel Karmazin (CEO of SIRI) has been testifying about the benefits of merging SIRI with XMSR, the National Association of Broadcasters (NAB) is lobbying in opposition. The NAB represents the AM/FM radio stations throughout the US. Given the ongoing debate in Washington DC about the proposed merger we give the deal a 50-50 chance of regulatory approval. Should the merger fail to gain regulatory approval, SIRI still offers upside potential for investors as a standalone company. Prior to the proposed merger, SIRI believed its operating model would push total subscribers towards 10 million over the next few years, generate positive FCF for 2007, and lead to positive earnings in 2008-2009. Our assumption is this business forecast would still be intact, absent a XMSR merger, given the company’s fast growing subscriber base. Since SIRI is giving no guidance on what operating results would be with an XMSR merger, we are adjusting our 2007 earnings estimate to ($0.39)/share and maintaining our rating on SIRI as a standalone company. On a standalone basis, SIRI management has given 2007 guidance of approaching $1 billion in revenues, 8 million subscribers, 2.2%-2.4% churn rate, and positive cash flow for the year. If the merger is approved by year-end 2007, then we will adjust our earnings estimates. For now, SIRI shares are recommended for aggressive/speculative accounts and our price target continues to be $8/share.”
Keep in mind that at the time, Sirius had approximately 1.45 billion shares outstanding, and shares outstanding does have a relationship to market cap. Next we look at a May 2006 XMSR report from CRT Capital Group LLC. In this report XMSR was reiterated as a “SELL” with target price reduced to $ 16 dollars from $17 dollars previous price target. At the time, there were 350 million shares of XMSR outstanding. Here is an excerpt from that report;
“The market is affording XM a market valuation of $8.1 billion. Under our Base Case scenario (which equates to current projections), we think the Company is worth approximately $4.9 billion today. We do not believe XMSR could successfully implement a 15% subscription price increase in the near-term without disrupting the current level of “above consensus” subscriber additions. While we do believe XM does have a level of price flexibility before our “above consensus” unit growth case would be seriously eroded, even that favorable combination creates a share value estimate that is more than 20% below current market levels, and in our view, whatever favorable option value there may be to justify a more aggressive investment view is overwhelmed by the more concrete regulatory and operation risks at hand. We think the risk/reward is not weighted in favor of XM’s common stock.”
Ok, so after seeing the two reports and taking into account the disparity in shares outstanding at the time between the 2 companies 1.45 billion for Sirius and 350 million for XMSR which combined equaled 1.8 billion at the time, one has to wonder how the combined company, with 3.9 billion shares outstanding, or even with 6.8 billion combined shares out accounting for the 40% Liberty Capital preferred conversion can only fetch .95 cents to $1.00 currently. The facts remain that the combined companies now have:
1) More subscribers than ever before as a single entity or as separate companies
2) Metrics are better than ever before
3) Operational costs are lower than they ever were for the 2 separate companies
4) Talent contracts are less costly than they were with 2 separate companies
5) Subscriber churn has been reduced
6) OEM contracts have been restructured/renegotiated to more favorable results for the company
7) Synergies continue to be attained
A monopoly in their space with no direct competition
9) Paying off of high interest debt early
These are just a few of the positives that can be listed regarding the company. Based on the current status of the company, one must wonder what is really going on. While it is true that additional debt was incurred to get the merger of these two companies accomplished, and that is generally a negative thing; it is easy to see that Sirius XM should be worth more in market cap and share price at this juncture. One would have to think that at some point fairly soon, a correction in the value of the company and share price is in order specifically since debt load has been restructured and reduced, and CEO Mel Karmazin has turned the company; by his own comments in previous conference calls; into a cash flow growth story. How soon analysts aknowledge the changes in the company’s business model and balance sheet remains to be seen.
Disclosure: Long SIRI
Nice article Steve. One would think with all positive metrics that SXM would have a significantly higher PPS at this juncture. Although the debt became a huge issue after the merger, there should be no doubt in the market place that SXM has the ability to meet future obligations due to the recent reductions and restructuring. Unfortunately, impo, the market appears to be looking for more significant reductions in overall debt that will improve the balance sheet and lead to credit upgrades. SXM’s existing debt has to get out of “junk” status to really gain the confidence of the overall market. This imho is the real catalyst for the PPS to rise significantly.
Brilliant!!! This is the point that should be driven into the heads of bashers and manipualtors although they would still not care. I only wish they keep shirting in the next several months so that could lose enough to sober them up. The true value of the company today is at least $14-$16B. The combined company is what they call “new quality” and should never be viewed as an addition of the two components. You demonstrated this so vividly in your list of “new quality benefits” as the result of the merger. This is what those morningstar geniuses are not getting or pretend not to be getting.
The only tough issue for siri to tackle in the next two or three years is the number of outstanding shares. The rest, as they have already demostrated, they will handle easily . I will not be surprised, knowing the genius of Mel Karmazin, that they will get rid of most of their debt by 2014 and then will be able to buy back shares unless they reverse split when they feel very strong about the company.
Sirius XM is turning into a cash making machine and, barred another economic disaster, they will start producing cash in droves in the next few years . One can only imagine what kind of impact this will have on their operation and value.
Thank you both for taking the time to share your comments and input. I happen to pretty much agree with both of your comments.
$14-16Billion?
Put down the crack pipe man!!!
You have utterly no knowledge on company valuation and clearly you are in the group of gamblers that can’t reason with logic. That valuation would indicate a value of about $750 per sub, who only pays $150 per year.
I would also point out that the debt IS a big issue and has not been going down but rather going up over the last year. For you to mention the debt but write it off as not meaningful, and carte blanche the value of the company should be higher>>>then scratch your head as to the disconnect? Come on man.
Look at metrics such as total cost per new sub-include SAC marketing and revenue sharing which is over $200- and it is clear the business plan is not working and the rational can obviously see it.
CHurn has not been reduced it is also going up. If a million subs leave with a base of 10 million churn is 10%…if 1.5 million subs leave with a base of 15 million the churn %-wise is still 10 percent but in actuality the churn increased 505. The churn for the last 10 quarters has slowly risen from 1 million per quarter in 2008 to well over 1.5 million per quarter. This is yet another fact you use to blur the truth and is why the stock is in your eyes too low a price.
As to those reports, they were all smoking crack back then too. Not a single analyst that I recall was analyzing the reality of the stock from the early days when Mel said 2 million subs would generate profit, and it was ignored and bumped up by Mel year over year. That is why this stock sucks and always will. The 2007 prediction is a real gem…and 3 years later they still lose money. Come on, do some analysis and stop using hype facts to try and support a losing venture.
Time you step back and take off the jaded glasses and analyze ALL that is presented. You’ll be able to sleep better at night.
Churn is going down actually. 2.2, to 2, to 1.8.
Take rate is also on an uptrend. Pentetration rate is increasing as well.
Revenue is increasing, while costs are dropping. How are these concepts hard to understand? Their debt? Their debt is payable with cash easily if current metrics hold, and they institute a price increase as Im sure they are planning on doing in August of 2011, after the FCC imposed blackout on rate hikes ends from the merger conditions.
Relmor,
My comment was naturally directed at Bubba, the genius. What you guys are saying on your site makes 100% sense. Your analyses have depth and perspective. What you are saying in your response is again on the lines of facts and reason. Barred another economic disaster, the company may produce as early as next year close to 0.5B fcf via synergies, efficiencies, ad revenue and organic growth. Only those with an agenda can igonore the fact that sirius xm is not an addition of sirius and xm. This is a nascent two-year old business with a great appeal to a very large part of the population (between 50M and 100M) creating a revolution in radio both from the point of delivery and content. The augurs who predicted siri’s failure proved to be wrong and look for more straws that will still break their back. You cannot stall progress no matter how much dirt you try to spill.
You are the guy my opinion is directed toward. Keep shorting!!! When you lose enough, you will learn your lesson. The parameters you are using in the assessment of the company are either incorrect or simply do not exist. Incidentally, siri is the most efficient company even today per an employee in cable/satellite business. Your ravings about the company are a part of your ignorance and bloat. I will bet $1,000.00 that the company will be profitable this year and will produce about $1B in fcf the latest by the end of 2012. Will you take the bet?
Demagogues like you can only be hit with money! If you paid for every word of lies you write, you would probably lose your computer among everything else. Let us wait and see who is right. Only time can show. I am confident that genuisese like you, Moritses, and morningstars who most likely have not created anyhtiong of value in their life time have no idea what they are talking about. They will shut up as early as this year because no one in their sober mind will be taking their bs any more in light of the results the company will be producing. Then we will see who is smoking, genius!
Bubba,
What are you smoking? Debt has been going down and restructured with much better terms. This restructuring improves cash flow with lower interest payments and bodes well for the company.
Bubba,
Your comments wreak of basher mentality. It is you ..who needs to recognize the difference in the company today compared to the past. Your lies are in plain sight for all to see. The debt load has been reduced not gone up. Total subscribers is a record high right now, in this train wreck of an economy. Churn has gone down this quarter…perhaps you missed the press release. If you are going to spout nonsense, there are plenty of other places for you to do that. Either give factual information to support your negativity, or you will be simply labeled a liar. I question why you would even post with such negativity if the stock and company are such a joke to you. Just move along….nothing to see for you here. Your motives are obvious, and people are certainly entitled to their opinions, but not entitled to flat out lie. Obvious you did not even read the article. Before you make a further embarrasment of yourself….I suggest you go read form 10Q quarterly report dated 7 May 2010. Page 17 bottom line for total debt….as of March 31 2010 is $ 2,764,305 compared to Dec 31 2009 which was $ 2,799,702 . Notice…the 2010 number is SMALLER….I think we can see where your credibility lies……have a good day. Here is a link to the 10Q for you…in case you care to deal with facts…..http://investor.sirius.com/secfiling.cfm?filingID=950123-10-46203
In my opinion – the depressed share price reflects the tremendous amount of naked shorting that has occurred in the past, and ridiculous rules pertaining to “market maker” activity that effectively permit the “counterfeiting” of the stock. Unless the SEC really cracks down on this – and enforces “Buy Ins” of all prolonged “Fails to Deliver – FTD’s” – then SIRI’s share price will continue to fall well short of reflecting true value, as well projected in the thorough analysis of this article.
How about doing a followup article on who exactly these “Market Makers” are, and specifically what rules give them exceptional exemptions to normal shorting and reporting requirements.
I have seen numerous posts on Seeking Alpha and other sites requesting such information – to no avail (particularly with regard to who these “Market Makers” are). Given the requirement to pre arrange trades through Flash Trading strategies, etc. – I assume the dominant players in this manipulation cabal are the largest of the High Frequency Trading crowd – but the specifics of their names and involvement have never really been uncovered. An article such as this would be highly informative and right up there with the type of work recently done by Matt Taibbi of Rolling Stone.
Guys, lay off of Bubba. His basher backers gave him a bonus for such logic. They have a lot at stake. Great, factul article, if I read the SIRI tea leaves correctly. This company has weathered so many perfect storms it is a miracle they have survived and have so many positives. Only another ‘double perfect storm’ (i.e, WWIII, a U.S. default) could derail them. Thanks for a very insightful article.