I've known for some time the risks inherent in owning Sirius XM Radio (NASDAQ: SIRI), but never in my right mind did I think the company would fail, leaving shareholders with nothing but a worthless stock certificate.
And yet here we are today with SIRI trading for 25 cents per share and a market capitalization of less than $800 million. Investors are expecting the worst with SIRI. All that remains is pure speculation on survival or failure.
It really comes down to that simple question: Will SIRI make it?
If the answer is yes, then investors can still reap a tremendous reward. If the answer is no, investors will lose everything.
How did we get to this point? The answer is quite simple. Destructive competition between two competitors in a race for supremacy that never did materialized resulted in cost structures that kept pushing profits down the road.
When it was realized that the industry could potentially lose both entities, a merger was announced. Oh, but wait, a government supposedly looking out for the interest of customers dragged its heels.
Losses mounted while both companies waited and waited and waited.
Reluctantly, the government finally approved the deal, but is it too late?
Just when the two companies were free to operate as one, the world changed. Credit froze and the economy headed into a tailspin not seen since the Great Depression.
Although there are very compelling reasons to own SIRI, the market focused solely on the debt of the company. With approximately $1 billion in debt coming due in 2009, investors concluded that, with no clear path to refinancing or retiring such debt, common shareholders of SIRI would be wiped out completely.
The company has done very little to refute that argument, allowing the stock to bleed to its currently pathetic state.
Yesterday, SIRI announced results that should have been cheered by the market. Instead, without complete clarity on the debt situation, investors yawned. Adjusting for an extraordinary writedown of goodwill due to stock value declines, SIRI reported that it lost $217 million, or 9 cents per share, on revenues of $613 million.
Earnings were in-line with Wall Street estimates and revenues exceeded estimates of $575 million. Subscribers increased by 344,100 net in the quarter, and the company backed recently reduced guidance.
There was very little news on the debt coming due in 2009. SIRI CEO Mel Karmazin said that a $300 million piece of debt due in February was reduced to $210 million and that the company was speaking with lenders about refinancing.
The problem, of course, is that the lenders hold all of the cards. In a normal environment, a lender has little interest in owning equity. It just wants to get paid back and earn interest on the loan.
In today's environment, a lender may conclude that the rate does not sufficiently compensate for risk. That means acquiring equity can be a real boost to total returns.
SIRI's lenders do not have to refinance. If they do, they will only do so by extracting a heavy price. Uncertainty as to what that cost will be is why SIRI stock is trading for 25 cents per share.
SIRI is not in default on its debt. Its only real sin is that it cannot pay back full principle when due without borrowing funds or issuing equity. That's where the whole timing thing just stinks.
SIRI is so close it can taste it. The company is still predicting cash flow breakeven in 2009, and the full impact of the merger with XM is still a long way off. Even with the collapse in Detroit, big partners with SIRI, the company is still growing with more to come.
Just imagine what this company could do in a normal economy. It would be truly tremendous.
For now, shareholders need to hold their breath waiting for the debt bomb to go off.
Will the company earn a reprieve? They most certainly deserve it. Shoot, it has yet to flex its muscles as one company. When it does, the possibilities are substantial.
Unfortunately, the lenders are the ones in control and nobody, not even management at SIRI, knows what they will do in 2009. Because of that uncertainty, I would not be a buyer of the stock.
If you own, keep holding. There is nothing to gain by selling at this point. If they're going down, they're going down.
The coach will turn into a pumpkin at midnight. Will SIRI make it home? Only the lenders know.