It appears as though Sirius XM (SIRI) has moved one step closer to beginning a share buyback or special dividend. Today the company announced that it had "entered into a new $1.25 billion five-year senior secured revolving credit facility." Sirius XM CFO David Frear was quoted in the press release as follows:
SiriusXM's credit quality has rapidly improved and we are pleased that the bank market has recognized that fact by oversubscribing the deal, allowing us to upsize the facility to $1.25 billion. This new facility will allow us to continue to drive down average borrowing costs and more tightly manage cash and debt balances and it further strengthens our balance sheet by providing a substantial and readily available source of liquidity for strategic opportunities, including the return of capital to shareholders and acquisitions.
Sirius XM management has repeatedly stated that it would be in a position to increase leverage, return capital to shareholders and saw no attractive acquisitions that would be accretive to earnings. A revolver gives the company significant flexibility to announce and begin a share buyback quickly without having to float a new bond issue. Most investors in Sirius XM are probably aware that the company's largest shareholder, Liberty Media (LMCA), has also expressed an interest in increasing the leverage at Sirius XM and having the company repurchase shares.
Is Liberty the driving force behind this move? It is certainly consistent with past actions by Liberty. On August 8th, Liberty issued a press release announcing its intention to split off STARZ and included the following:
The businesses, assets and liabilities not included in New Liberty would be part of a separate public company called Starz. Starz will consist of 100% of Starz, LLC, approximately $1.5 billion in debt (assuming full draw down of the Starz bank facility) and an undetermined amount of cash.
Subsequently, during the Liberty Q2 conference call the capital structure of both STARZ and Liberty was discussed, including these statements by Liberty CEO Greg Maffei:
[Starz] is more valuable as a standalone company with its own currency and will create shareholder value for the Liberty Media shareholders. It also because of the nature of the dividend we expect to pay from Starz to Liberty Media will create significant liquidity rather for Liberty Media, which will preserve all of our options with respect to Sirius, Live Nation and Barnes & Noble.
...I think we are going to send [Starz] out with more leverage than it currently has today. Our expectation is that we'll pay a dividend of at least $1.8 billion up to between its existing cash at Starz and the availability of the revolver. The net of that is I think that the debt level at Starz will be something on the order of 2.5 times or less when it exits.
...If I could add one more thing, this is a high cash flow generating business, there's a lot of free cash flow, relatively few demands on that cash flow. So, we think it can carry obviously more debt than it has today.
Not the bolded words in that last paragraph. Sounds a lot like the Sirius XM business, doesn't it? There's more:
Our view is that Sirius is under-leveraged and there's plenty of opportunity for share repurchase and other financial actions of the Company, which we deem as ultimately positive...
...there is a ton of liquidity at Sirius. There's not only borrowing capacity today. Our anticipation is over the next several years there generate billions of dollars shielded by the NOLs with decreasing leverage and the bulk of the CapEx necessary for the satellite launches and the like are having already been spent. So, this is going to be a huge free cash flow generator. So I think this is not a case where we look and say, we need to be conservative with our cash or their cash by issuing stock, it's quite the opposite.
There were a significant number of questions asked about the capital structure of Sirius XM and future plans of Liberty with respect to their stake in Sirius XM. I think investors will find it useful to go back and read the transcript of that Q2 call for additional insight.
Both Liberty and Sirius XM have made no secret about their desire to see the balance sheet at Sirius XM levered up and using that leverage to return capital to shareholders. This indicates that the only reasonable way to look at the recent announcement of the revolver is that it will be used to return capital to shareholders.
Is a special year end dividend in the works? I doubt it. Far more likely is that it will be used to begin a share buyback. It's a buyback that could even begin before the FCC approves Liberty's application, provided Liberty is willing to be a pro rata participant.
The share prices have not shown much of a reaction to the news about the revolver. It will be interesting to see whether the market has a delayed reaction as it continues to digest the news.
Disclosure: I am long SIRI.
Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position, as well as some $2 and $2.50 January 2013 and $2.50 December covered calls. I may initiate (or close) a buy stock/sell option position in SIRI at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so. I have no position in LMCA.