Sirius Rabid Stock Buyback

Back from the brink of bankruptcy, the satellite radio giant is on the hunt for $2 billion of its own shares and a new CEO

For a company that was just hours away from bankruptcy about 18 months ago, SiriusXM Radio has come pretty far. And it’s about to go even farther.

After experiencing soap opera-esque shifts in power dynamics over the past two years, the satellite radio giant is on a hunt for a new CEO following the departure of Mel Karmazin. Sirius is also preparing to repurchase up to $2 billion of its own stock (or 10% of its total shares) over the next 12 months, and potentially another $2.5 billion in 2014.

That move will result in a massive transformation of the company’s capital structure, and potentially drive the long-term direction of its stock price.

After nearly a decade of red ink, the company actually has some cash to spend on itself. But it needs more cash to achieve its goal of buying back even more stock down the road.

Sirius has enough liquidity and implicit permission from its current lenders to buy back roughly $2 billion of its own stock by June 2014. But a lack of access to cash isn’t what’s stopping Sirius from doing this faster. Rather, it’s the lack of permission to do so from its existing bond holders.

Onerous conditions forced Sirius to borrow money when the company stood on less sure footing, and unfriendly capital markets didn’t help. Combined, those factors restricted how much money Sirius could spend on its own stock repurchases. In 2010, the company’s recurring free cash stood at $100 million. By 2015, RBC expects that number to rise to more than $1.2 billion.

As a result, despite a business and balance sheet that would allow Sirius to borrow money, Sirius can’t tap the dry powder that would allow it to accelerate its stock buyback.

Sirius will probably renegotiate those covenants in one of two ways: Get a waiver from the existing bondholders, or refinance those bonds. Either action will come at some cost, but in the scheme of things, that cost won’t be a gamechanger.

If this is accomplished, it could enable the company to repurchase more than $2 billion of stock in the current calendar year, and as much as $4.5 billion in total by the end of 2014. This would be an astounding feat for a company that seemed to be staring at the edge of the financial abyss in 2008.

The bigger question is whether this change will happen in the next year, or if it might take up to two years.

Share buybacks are a popular trend among media companies right now — Viacom, News Corp., Time Warner and others have bought back billions of dollars in the past year alone.

The trend represents a come-to-Jesus moment the industry seems to have had over the past three or four years. When the markets were flush, extra money often led to acquisitions. As the country has struggled to recover from the 2008 financial collapse, the heads of media congloms have realized that they’re being judged by their stewardship of capital, because you never know when the next financial meltdown will hit.

More important, if investors are not afraid of a firm making a bad acquisition, they’re more inclined to buy its stock.

A company’s own stock is one of the cheapest things it can buy. It’s better than buying something else, unless that something else is incredibly strategic.

Therein lies an issue for Sirius: There’s really nothing out there that makes a lot of sense for it to buy. Its 2008 merger with XM gave it an extraordinary business model: Nearly 70% of new cars rolling off the lot in the U.S. today have a factory-activated Sirius radio in them.

RBC expects the number of subscribers to grow to more than 26 million by the end of 2014, up from 19 million in 2008. In 2008, Sirius saw 1.6 million net subscribers, a number that decreased dramatically the following two years.

John Malone’s Liberty Media assumed majority control of Sirius in January. Moving forward, it will be interesting to see who Malone picks as Sirius’ new CEO. After gradually amassing stock in Sirius, Malone finally wrested control of the company away from Karmazin in what became a very public fight for power over Sirius’ license fees.

As Malone has re-organized the company’s capital structure, his next step will have to look far into Sirius’ digital future. Do they look for someone who will branch them out more into the online distribution system, or do they want more of a subscription entertainment expert? Do they need a visionary like a Steve Jobs or a pragmatist like Jack Welch?

There will be competitive threats in the long run from Pandora and Spotify and the potential Apple service, but that’s a function of the ubiquity of 4G penetration into the automobile, and it’s probably years away from materializing in a substantially threatening way to Sirius. When we all buy cars with 4G Internet connectivity, maybe Sirius can worry a bit.

But what’s happening now would have been inconceivable four or five years ago. Sirius went into the 2008 financial crisis heavily leveraged with extremely expensive debt to boot. Its merger with XM was still in a build-out stage, and the company had to spend wildly in order to grow its operations. On top of that, car sales collapsed, the markets crashed, and Sirius found itself with fixed content commitments (two words: Howard Stern) and a liquidity problem.

As the world has stabilized, Sirius has dramatically lowered its cost of debt. It’s raised prices. It’s renegotiated some of its content agreements. And it’s now about to benefit to a tune of $90 million per year from its renegotiated contract with General Motors. Sirius’ merger with XM, in the long run, has offered Sirius certain valuable overhead synergies. Now it finds itself in the position where it doesn’t need to spend the excess cash it has on growing its business as aggressively.

David Bank, the author of this article, is a research analyst at RBC Capital Markets, LLC (member FINRA, NYSE, SIPC). This article summarizes or otherwise incorporates material that the author has previously published in research reports that were provided to both eligible clients of and internal personnel at RBC Capital Markets, LLC.

Required Conflicts Disclosure
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total
revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by
investment banking activities of the member companies of RBC Capital Markets and its affiliates.
RBC Capital Markets, LLC makes a market in the securities of SIRIUS XM Radio Inc. and may act as principal with regard to sales or
purchases of this security.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than
investment banking services from SIRIUS XM Radio Inc. during the past 12 months. During this time, a member company of RBC
Capital Markets or one of its affiliates provided non-securities services to SIRIUS XM Radio Inc.
RBC Capital Markets is currently providing SIRIUS XM Radio Inc. with non-securities services.

RBC Capital Markets has provided SIRIUS XM Radio Inc. with non-securities services in the past 12 months.
The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA.
Research personnel, including the analyst or analyst team responsible for this report or recommendation or any individuals directly
involved in the preparation of the report, including their supervisors, hold(s) or exercise(s) investment discretion over a long position
in the common shares of SIRIUS XM Radio Inc.

All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the
subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or
indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

By David Bank, Senior Equity Media Analyst, RBC Capital Markets and edited by Rachel Abrams

Illustration by Jameson Simpson

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