Sirius XM Tries to Save Itself; Will Stock Sale Work? [UPDATED]
Sirius XM got approval from shareholders for a reverse stock split and now is working on a plan to issue over 108 million new shares of stock. The latest financial moves by Sirius are necessary, given a stock price that's a little over a dime a share, potential Nasdaq delisting, $193.6 million in convertible bonds maturing in February as part of about $1 billion in loan repayments next year, and not enough cash. But there's a big question as to whether any of this will pull the company out of its death spiral.
The problem is that Sirius faces fiscal disaster from a number of different directions. Start with the current stock price of 12 cents a share. If it doesn't get the stock price out of the basement, then Nasdaq will take the company off its roster, because there's a dollar a share minimum to stay on that exchange. That's a kiss of death. Company shareholders would lose liquidity, possibly making the value even lower than it is now. Sure, many companies do trade over the counter, but not in a big way. The fewer the people who want to own stock, the less of a chance the company has to use stock as a tool to eventually get itself out of the pit it is in.
But there are two additional problems that come out of being delisted. One is that delisting is probably one of those conditions triggering financial covenants in loans, lines of credit, and other obligations. Suddenly, Sirius wouldn't be simply be facing a billion of payback next year, but some unspecified and probably large sum that would come due immediately, with no time for management to react.
Also, further blows to the stock would translate into even worse credit ratings, meaning that the chance of borrowing enough to keep going in the short term would become remote â€" and credit ratings would be another potential trigger to financial covenants. The credit downgrading already started to happen yesterday, when Moody's dropped Sirius from Caa1 to Ca, which is as low a rating as the firm provides, and means "in default with little prospect for recovery."
Forget about cash on hand being a help. According to its last 10-Q, Sirius burnt through over $5 billion in cash in the first nine months of this year and had cash and cash equivalents of under $360 million at the end of September. A look at the cash flow statements shows that money continues to go out at what is at least an order of magnitude than it comes in. The company simply doesn't have enough cash to keep going, even if there were a pot of gold at the end of the rainbow just down the street. And with the turmoil in the auto industry, one of the big consumers of satellite radio, the chance of more lucrative days to come is slim to none. [UPDATE: A reader pointed out that I had screwed up when looking at the cash flow statement. Much of this was due to the write-down the company took, and that had to be reflected in cash flow to make the numbers balance. (Ah, double-entry accounting.) But that still leaves the company well in the financial hole and no brighter prospects. Instead of being buried at the bottom of a hill, it's under a large mound.]
The stock moves are desperation on the part of shareholders as well as management, which actually went so far as to predict that it would hit a profit by next year. Maybe so. Maybe investors will regain confidence. Maybe the reverse split, compressing at least ten shares of stock into one, would drive the value of a share up to a dollar, with the additional sale of common stock covering the February bill. But that's arithmetic and logic, and even when this might be the last hope for Sirius XM, the market doesn't work that way.
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