Sirius-XM: another slap, or real opportunity?

Chris Forrester

Pay radio broadcaster Sirius-XM will hold its AGM a month from now (May 27) in New York. One of the agenda items before stockholders is a decision to increase its issued shares from 8 billion to 9 billion. This dilution is but the latest slap in the face for long-term shareholders who have been, by any measure, extraordinarily patient given the appalling collapse in their investment's value. But is it now time to acquire further stock? And what are Sirius-XM's longer-term prospects?

Let's be clear on one thing: the AGM will approve the fresh share issue. Liberty Media's massive holdings in Sirius-XM almost guarantees majority approval. Smaller shareholders will justifiably huff and puff, but the end result is already in the bag. The extra 1 billion shares will raise - at current values - around $500m of fresh cash - and security for the business, and at the same time protect Sirius-XM (and John Malone) from any further incursions by the likes of EchoStar's Charlie Ergen.

The fresh finance will also enable Sirius-XM to look Wall Street in the eye as far as debt repayments are concerned, and one can only hope that towards the end of this year the debt markets will have recovered and be offering fresh financing at less than usurious rates of interests.

One Sirius-XM commentator has recently asked rhetorically whether this move will be the end of Sirius-XM's mess? That valid question can only be answered by Sirius-XM's managers, but this is the year when the merger's cost savings really start kicking in. Later this year will see the USA's auto-suppliers - hopefully - start recovering their sales prospects with 2010 models. The merger's FCC obligations restrict what the broadcaster can do as regards price increases on its basic bundles of channels, but again the prospects for further cash savings as regards programming costs and payments to rights-holders can only improve as contracts come up for renewal.

Rapid TV News is absolutely not an investment adviser. But we have always been fans of satellite radio, and we feel there's more upside to Sirius-XM's prospects, that downside. For example, we have yet to see any move from John Malone's Liberty Media. Malone can be a passive investor, but he certainly likes a firm return on any investment he makes. It is worth asking how Liberty might leverage its Sirius-XM asset. Indeed, where's DirecTV - another Liberty investment - in the longer-term mix? How many DirecTV subs have Sirius or XM subscriptions? In other words there's still plenty of upside potential, notwithstanding this latest slap in the face for stockholders.

And while 'jam tomorrow' is always a lousy argument for troubled investors, the prospects of 20m subscribers being achieved, plus lower OpEx, plus John Malone's extra input cannot all be bad news. The days of a $15 share price may never return, but at these current prices cautious investors looking for the longer term ROI might take comfort in its prospects.