Yesterday I wrote an article on Seeking Alpha that Sirius XM Radio (SIRI) was one step closer to a share buyback after an announcement that it had entered into a $1.25 billion dollar, five-year, senior secured revolving credit facility. I noted that both Sirius XM and its largest shareholder, Liberty Media (LMCA), had expressed a desire to lever up the balance sheet of Sirius XM and return capital to shareholders. The revolving credit agreement discussed in that article gave Sirius XM flexibility that could be used to return that capital. I wrote:
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.
Well, I'll be the first to admit that I was wrong about the special dividend. It's hard not to when today's press release from Sirius XM includes the following:
The Board of Directors also declared a special cash dividend in the amount of $0.05 per share of common stock, payable on Dec. 28, 2012, to stockholders of record as of the close of business on Dec. 18, 2012. The company's preferred stock will participate in the dividend on an as-converted basis in accordance with its terms. The total amount of the cash dividend is expected to be approximately $325 million.
Well, it pains me to say that my forecasting about the dividend -- "I doubt it" -- was a bit off, but there is a silver lining. I have always preferred dividends to stock buybacks. Over a year ago in an article on my feelings about a Sirius XM share buyback, I wrote:
I would prefer to see a dividend indicating the company expects to have consistent earnings to maintain and grow payments to shareholders
Even though this is not the start of a regular quarterly dividend, as an investor, I am still happy to pocket the nickel per share. And as much as it pained me to state that my forecasting on the dividend was a bit off, it pains me even more to put my dislocated arm back in its socket after trying to pat myself on the back over the accuracy and potential timing of the share buyback.
The press release also stated:
Sirius XM ... today announced that its Board of Directors has approved a $2 billion common stock repurchase program. Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions. Liberty Media Corporation, the beneficial owner of approximately 49.8% of the company's stock, has indicated that it will participate in the company's share repurchases on a pro rata basis so that its relative ownership interest will not be affected by the program. The company will fund the repurchases through cash on hand, future cash flow from operations and borrowings under its revolving credit facility.
In pre-market trading the shares moved up to $2.87, and are currently trading around $2.85.
What Investors Need to Know
Buyback announcements are not a commitment to follow through and may be cancelled or suspended at any time. There is no time frame on the Sirius XM share buyback and all the traditional disclaimers about buybacks are included in the press release. This is most likely only the first part of a share buyback. Liberty CEO Greg Maffei has stated that Liberty wants to get back the $1.5 billion it has invested in Sirius XM and noted:
I think a consideration in our mind would be, and obviously we have announced no intent to do a Reverse Morris Trust. We've only suggested its one path. But I would note, if we pursued that path, something that would weigh on our mind is, we got the first 40% of the company for free virtually. The next 11 points have cost us well over $1 billion something if we got to 51. We would probably like to get the bait back on the 11 points.
If Liberty participates on a pro rata basis, it only gets to sell back $1 billion of the $1.5 billion spent so far. More buybacks will need to be announced. Also, Maffei has stated that Liberty would be reluctant to spin out high cost basis shares. A buyback at $3 per share will only take care of 333 million high cost basis shares purchased by Liberty. It will still hold more than 320 million high cost basis shares. If the prices Sirius XM pays in the buyback are higher, the number of high cost basis shares Liberty will hold increases.
The market has given a preliminary thumbs up to the announcement with share prices closing up nearly 3% in the pre-market on volume of more than 30 million shares. The press release notes:
SiriusXM retains ample capital capacity to continue making long-term investments in its programming, research and development initiatives and overall operations, as well as pursue strategic opportunities that may arise.
That "ample capital capacity" could suggest that more buybacks and more debt are coming soon to Sirius XM.
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.