Street Speculator

The SPECs initially thought the reverse stock split the company is considering would enhance its stature on Wall Street. We did have the company on our previous “Reverse Split” list. Sirius XM (Symbol: SIRI) currently trades at $0.31/share, which removes the stock from being purchased by mutual funds (Mutual Funds are usually prohibited from buying stocks trading under $5.00/share). Sirius however does not generate enough revenue to service its debt obligations and pay for programming costs.

The merger between the two satellite companies has not produced the “cost savings” everyone thought would occur. 2009 will not be a good year for XM Sirius. According to their latest 10 Q, they have a substantial amount of debt due in next year. Look at these numbers:

$250 million credit facility– Matures in May ‘09

$100 million term loan– Matures in May ‘09

$400 million in Convertible Senior Notes– due in December ‘09

$300 million of 2.5% Convertible Notes– Matures in February ‘09

The SPECs would be more optimistic is this wasn’t such a bad credit environment. However, with the virtual stoppage in lending, Sirius XM will probably not be able to refinance any of the above mentioned debt at favorable terms, if they can refinance at all.

This is a direct quote from the Sirius XM 10-Q form: “An inability to access additional sources of liquidity to fund our cash needs in ‘09 or thereafter or to refinance or otherwise fund the repayment of our maturing debt instruments could adversely affect our growth, our financial condition, our results of operations, and our ability to make payments on our debt, and could force us to seek the protection of the bankruptcy laws, which could materially adversely impact our ability to operate our business and to make payments under our debt instruments.”

We did not mention Sirius XM’s other obligations:

Rights fees to MLB for $60 million annually through the year 2012, 5yr. $500 million to Howard Stern (Although some of that money was paid in company stock),

and $18 million annually to Oprah Winfrey (Oprah Winfrey and Friends show) for the next three years.

Sirius XM’s main source of revenue comes from subscription fees, including the prepaid subscriptions paid by auto manufacturers (Those free 6-months of satellite radio you get when purchasing a new car is actually paid by the auto manufacturer). However, with the slowdown in auto finance and purchasing, this source of revenue will diminish substantially. Also, as people cut discretionary spending, satellite radio services may not be one of the “necessary items” purchased from retail stores.

Sirius XM does not have many options if any. A reverse stock split would only look good on paper. This option is not a definite, but just an option. But, the SPECs believe Sirius XM will file bankruptcy to get favorable terms on its outstanding debt obligations (They will not be able to do so in this current environment).

If you want to profit off of Sirius XM, buy the corporate bonds and not the stock. At least bondholders have some input into the future strategy of the company post-bankruptcy, which also may include an attempt to reduce some of the programming fees paid to MLB, Howard, and Oprah.