Circuit City's Potential Buyers Offer Hope for Sirius Investors

Credit is tight. No one is Lending. Financing right now is impossible. These are all comments or sentiments that many have felt or heard during the past several months. Everyone seems to be waiting for the bottom to be established. News today about embattled retailer Circuit City (CCTYQ.PK) may show that there is a possible ray of light on the horizon.

It has been reported that Circuit City Stores Inc. is in talks with two interested parties that could buy the company or provide additional financing for it to stay in business. Circuit City filed for Chapter 11 bankruptcy protection this past November amidst slumping sales and a slumping economy.

Circuit City stated Friday that “highly motivated and interested parties” are expressing interest in providing additional financing to allow the company to sustain operations and move forward with a subsequent restructuring plan. It is said that the interested parties are nearly complete with their due diligence and moving into negotiations.

For satellite radio investors, news that such a large financing deal has the possibility of happening is positive. Sirius XM (SIRI) faces about $180 million in debt due in February, with a total of nearly $1 Billion due this year. The company has been actively dealing with the debt load, and has indicated that it is their desire to get the 2009 debt financed by March 1, 2009.

While a Circuit City deal is not a sole indicator of what is happening, it does demonstrate that larger deals can still happen, even for embattled companies.

[Associated Press]

Position - Long Sirius XM, No Position Circuit City

Comments

[sl62:]

Good report Tyler. I, for one have little doubt that the debt won't be properly addressed. Credit is unfreezing, rates continue to decline and lending is happening once again. Had all this credit BS not happened this year, the debt would already have been addressed by now. Just as Tyler states for CC, and which SIRI detailed in their annual meeting PPT, they are looking for new significant investors (or inwestors! lol). Trouble has been even new investors need access to credit or they at least need some proof that the economy is somewehat stable and not ready to implode into dust. We all have to realize that many were waiting until '09 for a new time horizon on the books to begin making investments in earnest (and for proof of stability). In the market, the January small cap buying effect is easy to see. Money is flowing again and will only get better from here. One aspect of Tyler's report is very important so I'm calling attention to it.

>>Circuit City filed for Chapter 11 bankruptcy protection this past November amidst slumping sales and a slumping economy.<<

Key phrase there is >>amidst slumping sales<<. This is why a company, any company would have reason to reorg in the courts. When youhave slumping sales, you are DOA. you have no chance. And that's the difference in SIRI. Their sales are not slumping, they are the opposite-- robust. Companies with robust sales do not file for bankruptcy. Some people here think anyone or company can just decide to file to hide from things like debt issues. Not true. A judge would catch that immediately and ask the company "I see you have great sales, why are you filing?" If the only answer is duh, we took on too much debt FOUR MONTHS AGO, the judge would laugh them out of the room and would be denied. They would be ordered to go make it work...or have them arressted for being stupid. Believe it. If SIRI was going to file for BK, it would already be done. But they haven't because they know they can't, let alone don't have to. Instead, thery're doing what they are supposed to do. Work it out.

Trouble is A-holes like the guy who just crashed many regular posters' ratings here, can't see past their frickin noses and are too impatient. That's not how it works DB's. Sometimes you have to wait a while before corrections are made. The fact that I even have to say that to you makes you a pimple. Get a life!!!!!

Jan 11 11:32 AM

[OKMONEY:]

sl62: When you get a chance read 11 U.S.C. sections 1101-1141. Pay special attention to section 1129(b), commonly called the "cram down" provision. While you're at it read up on the "absolute priority" rule. As you probably don't know bankruptcy is not a high school subject. Why do people give legal opinions about something they know nothing about and are not even close to qualified to give an opinion. sl62, do you give medical advice too?

Jan 11 03:39 PM

[sl62:]

Ok, Mr. Okmoney...

What is this irritate sl62 day? I see you've picked out the fraction of my post (OPINION not PAID-FOR CONSULTATION AS AN EXPERT) and gotten cute. Why? Aren't you intelligent enough to raise an issue you might have without being a total A-Hole? Apparently not. Cram down assumes the case is already assigned a number and a plan has been created. I never went that far sir. My comment alluded to that GENERALLY, companies that still have robust sales and not seeing a downturn in business are not the ones filing for bankruptcy. SIRI's challenges at the moment are too much debt (AND much of it causing the issues just taken on 4 months ago), not top line/ slumping sales. Had they reported slumping sales in Q3 (didn't) or upcoming Q4 (by the numbers being raised at the recent annual, won't), as said, BK might have already been filed out of sheer necessity. But to the contrary. And IMVHO btw...as I must be clear with you.

So, what, are you BK lawyer or something? If so, you're a horrible communicator. But also if you are, your opinion would be valued...if only you knew how to communicate it. Instead you derive more pleasure on being a joker.

Jan 11 04:29 PM

[SJAmes6621:]

terrible mgt incompetence, and they treated their employees as s..t. And with the terrible turnover of their employees, hardly anyone knew what was going on. And most of the employees didn't care - they understood how they were being used while the mgt raped the corporation

Furthermore, about 3 years ago it was evident that the main business was a bust. The only places CC was making money was their own Credit card operation (sold off to one of the banks) , and extended warranties which most people have realized are just a cash cow and a terrible deal for the consumer.
And someone told me they were selling computers at a 16% LOSS, and that doesn't include the overhead costs. Hell of a way to run a business.

We'll see what happens, but i made one correct decision it seems - not to speculate on buying 1000 shares at 10-12c/share.

Jan 11 05:52 PM

[OKMONEY:]

sl62: My apologies if I offended you. You are also not the first to note my sometime perverse sense of humor. As an olive branch here's a little Chapter 11 101 [I've been doing this for 32 years now]:
Creditors are divided into classes. For example, secured, priority, unsecured and equity holders. Most often a Chapter 11 debtor is tremendously handicapped by its security agreements, mortgages, lock box requirements and various other forms of securitization of its assets such that secured creditors run the show in a Chapter 11. The very first hurdle is the use of "cash collateral". It's hard to think of a business entity that has not mortgaged its accounts receivable and inventory; that's "cash collateral" when the inventory is sold or the account receivable is factored. The Debtor-In-Possession cannot use cash collateral without permission from the creditor secured by the accounts receivable, inventory or other "cash collateral" items. If that creditor refuses to grant permission it's a trip to the courthouse. I don't know the specifics in Circuit City's case, but, clearly the creditors secured by items that can be turned into cash collateral agreed,but you can make book on the stranglehold provisions in the agreed order allowing Circuit City to use cash collateral. In essence the cash collateral creditors want to be made as whole as can be and only give up enough cash to keep operations generating their cash. Creditors secured by fixtures, real estate and other personalty want a section 363 sale of CC's assets [a sale free and clear of any liens or other encumbrances which will attach to the proceeds upon sale], or, a conversion to chapter 7, liquidation. Senior unsecured debt, bondholders usually end up as the only shareholders if a Plan is confirmed. Unsecured creditors, vendors, services, independent contractors, etc are usually SOL. Priority creditors, taxes, employee contribution plans, wages, rents, get paid before senior debt and unsecured creditors. You can bet there have been a few plans thrown around in CC's case but you've got to watch what you say and to whom because the Disclosure Statement has yet to be filed [yes, there's a case number; has been since the moment it was filed]. The disclosure Statement has been likened to a prospectus. The "Absolute Priority" rule says a Plan cannot be confirmed unless all prior superior classes of creditors have approved the Plan by a majority vote. So, the unsecured creditors cannot get a Plan approved unless the bondholders also approved the Plan. It gets a little sticky here because the absolute priority rule only applies to an "impaired" class of creditors, i.e. they'd be in a lesser economic position than they were before the 11 was filed. A court can "cram down" a plan even if an impaired class votes against the proposed Plan if it's in the best interests of all creditors; rarely happens. In CC's situation I think they're just running the clock selling all the inventory they can and will eventually end up being converted to a chapter 7. Quite frankly, from a purely economic perspective Sirius is an ideal chapter 11 candidate with a high potential for a confirmed Plan: Secured creditors stay in place, being secured by the subscription revenue stream; bondholders become stockholders; unsecureds go fly a kite. Mel is either a genius or is replaced, makes no difference because a year after emerging as a reorganized entity Sirius gets recapitalized by floating a new common stock issue. Economy might be good by then; a successful secondary, really an IPO, would put the old bondholders, now shareholders on easy street. How's that for financing the debt that comes due in February.

Jan 11 05:56 PM

[sl62:]

OKMONEY...

Apologies here too. Obviously if i knew you more I would have gotten your humor...I took it the other way. Sorry, it's been a trying day and thanks for the detailed insight...much appreciated. That's why I post here, to share opinions and knowledge with others. I had the feeling this was your area of expertise.

Hmmm. See your points but I'm going to go out on a limb and still believe that SIRI can get around a formal Chapter event. For a few reasons. See what you think of this...

1. As a specialty content provider, I see them needing to be a bit more careful with reputation and stigma. CC is more of a classic candidate having a lot of brick and mortar and inventory to contend with. As the other poster said, a classic case of over building, then having the floor fall out on top of it...and having the credit card revenue made it easy to mask the other failings of the business execution. Pure B&M retail is a tough space due to trying to properly regulate expansion, so a company like CC filing doesn't surprise me (esp. having to compete with a behemoth like Best Buy. SIRI of course a different model yet plagued by similar over leveraging (talent and now acquisition). Of course as said, if they absolutely need to file, they will regardless of rep, but my take is they will avoid a Chapter at all costs. In addition for the same reason GM did not want to. Look at what happened to GM sales THE MINUTE BK was off the table. Consumers started buying with confidence and increased sales were reported in the last part of Dec... Before that, that's the only question consumers were asking salespeople. "Is the company going out of business?" (which is the stigma with any kind of official Chapter filing, IMO). Granted a SIRI sub is not a car purchase, but I think the concept of BK would be alarming to existing and near-term sub base. It would be messy and too much money wasted on damage control. They already tread water IMO with marketing efforts and convincing consumers how great their service is or why they need it. So I'm wary there.

2. Q3 was encouraging and by the increased guidance they released at the meeting, I have to believe Q4 will satisfy the Street (and the point also mentioned at the meeting on their PPT..other potential investors in the company--a la Buffett's Preferred in GS). I do recognize on the latter point that Buffett got 10% and that's the kind of action SIRI is trying to avoid having to pay.

3. I don't know for sure what CC's recent store sales were like prior to filing, but I think I recall they were down overall, and for some time. That was my point earlier about what companies file and which ones don't (necessarily). SIRI's in a different spot, their sales are strong and appear to be maintaining that strength. If churn maintains in Q4, it will be a big positive and support their case for further strength. I realize this has little to do with their ugly debt load proper but it may make a difference with different new funding options/renegotiations...

4. The approved additional shares from the Proxy. Up to now, they have been exhausting their previous approved common in debt for equity swaps. The 2 1/2 Notes due in Feb are with GS. It appears at least that GS sees future value in holding this common (or wouldn't it make sense they would want no part of accepting common shares?). If I were a bondholder at this stage, at this low price and good company metrics, why woldn't I accept equivalent shares for some or all of money I'm owed and hold the shares expecting even more return when the value increases? Why do I also believe that GS has been already assured by the company that a Chapter event is not happening...thereby assuring that this common will remain in tact? You might say well, GS is just taking the shares directly to market for their cash...but by the recent action on the stock, I don't believe that to be true. In the end, having the additional common to work with, I think it gives them just another tool to use. I believe that at .14 much of that dilution is already baked in. The Street so far seems to view this protocol as a positive.

5. Said renegotiation outside of a Chapter with bondholders and bank facilities. Some here, including me, believe the Feb debt is a no brainer at this point. That leaves the next hurdle in May which is a bank facility (I think 300M). The potential there is by showing solid positive metrics post buyout, they might be able to extend that principal. My take is at least a year since they have no debt due in 2010. Dec. 2010 would be optimal IMO and would give them plenty of time to properly address it. Then the remainder of the approx 1B that was due this year is in Dec. Again, nearly a year away yet, it gives them time to work on exactly the best way of addressing that (and in a we all hope a much better environment than the Oct-Dec 08 mess was. In terms of renegotiations with bondholders outside of a Chapter, I've been keeing an eye on CHTR. That's exactly what they have been doing recently. They have a MOUNTAIN of debt (I think like 20B overall--but on 6B of top line). But BK was recently also priced in to their common recently. They hit a low of .08. Last week they popped up to .23 on renogotiation news. Now it will remain to be seen if that was just a short unwind (which as you know, is common at some point near or shortly after filing), or if there is new traction. Next few weeks should tell us that story. As a similar story to SIRI, I'm keeping my eye on them.

At this late stage, I believe SIRI knows their plan (not meaning the one with the capital P lol!). I think the environment is getting better every day coming off of the freeze up in the Fall. I might be more optimistic than you about how this gets resolved. Your points are taken and as you say towards the end of your post, that is a neat little plan. Something tells me though that it won't be the plan right now (at this time). 2013, and the new buyout XM debt due in 2014 will still remain as hurdles for the company. And that may be a time to reevaluate your scenario. But by then, they will be much more established as the new combined entity and with a much higher sub base (according to currenet guidance). It may just be necessary at that time. My take is for now, is they will be able to create enough breathing room for all involved so that things can normalize a little and they can get back to focusing on growing the business. IMVHO...

I'd be interested to hear any further thoughts...

Jan 11 08:28 PM

[sl62:]

SJAmes6621...

I'm curious...you said you made a wise decision not to buy CCTYQ @ .10. They closed @ .305 on Friday, just up .14. Probably on this news Tyler is reporting. But I've been tracking the stock..they went into the Pinks @ .06 (typical BK price for most common I've witnessed over the years) then jacked to .30 a few days later with the short unwind (also very typical). If you were in then, that was the out... but since then, they have actually maintained at about .15. Then Friday they shot up again on the news. If you were looking at .10/.12...Oh, I just realized you said 1000 shares. Yes... a play like that requires at least 10K+ shares to make something worthwhile. But as such, it's not a bad VERY short-term play in similar situations. .30 is very common before it may then just pull back for good. Sorry..nevermind...I answered my own question to you.

Jan 11 08:48 PM

[OKMONEY:]

sl62; I've been long SIRI for a long, long, probably too long of a time. I'd be embarrassed to tell you my average basis. Sirius won the battle, but NAB won the war. Here's what worries me: Sirius said in the annual shareholders meeting PPT it is looking for serious private investment; I read between the lines they're looking to go private. A secondary won't bring the money they need for debt service, let alone debt retirement. Automobile sales are not going to pick back up again. Sirius is never going to get the subscribers they need as a result when added to the basic contraction in the economy. Let's face it Sirius is a luxury item and will be real easy to cut out of any household budget. I don't like companies with a lot of debt, especially companies whose assets are hard to value with a short term debt that very well could render them technically insolvent. How do you value subscriptions that can be terminated, and are being terminated, in a New York minute. How do you value the talent, like Howard Stern; he could turn to coal in a Christmas stocking in a New York second. I know the figures Sirius puts on the balance sheets for these assets, but there's no tried and true way to determine their valuation methodology. Yes there are some analogies like cable TV, but I think our world of "Happy Motoring" is contracting or even dying as opposed to a growth market in TV. The spread between treasuries, CD's and corporate bonds tells me there's little confidence in the future of American business. Mel might get financing but it'll be a bone crusher like the deal ETFC made with the devil, Citadel, in November, 2007: 12.5 % springing lien notes and 20% equity for a song and a dance. Sirius is playing the business equivalent of that popular game we used to play in the infantry: loser dies; winner gets to fight another day and take a chance on being the loser. I know it's a dark thought, but Sirius is looking into a very dark abyss. Barring the president elect telling the American people to subscribe, or Warren Buffett taking a big equity position Sirius's hand may be forced into the world of Chapter 11 financing. There's PR and stigma to consider, but as long a subscribers get their favorite line up when they turn the radio on it won't matter. Look what Chapter 11 financing has done for the airlines. Too many people think the BOD has a fiduciary duty to the shareholders; quite the contrary; the fiduciary duty is to the corporation. At all costs the business of Sirius will be saved and, of course, at the expense of the shareholders. As far as GS goes don't you think they shorted SIRI all the way down? What about the new competition, RaySat and AT&T. Like I said at the get go; Sirius won the battle but lost the war.

Jan 12 12:31 AM

[sl62:]

OKMONEY...

Thanks for the intelligent exchange. IMO, this is the good part about blogging...

I still rmember buying SIRI @ .76 in 2003. Though I have not been a consistent holder of the stock since then. I've gone in and out and got in again recently right after the revalue...yet have still taken a significant hit averaging all the way down.

Well, your thoughts are not without some merit though I'm expecting that you will be at least a little wrong. And at very least, I'm expecting SIRI to win a few more battles near-term though in the end they may well just lose the war (debt). I think many investors would welcome even a normalization of the common somewhere approximate to the revalue number. I think if a few of those short-term battles are won, we could see that due to how this stock has been so beaten down. There are many "unnatural" forces at work behind the secenes (the hedge short from the buyout deal (MS, UBS) and the current 260M short interest) that if normalized would produce a desired effect and encourage some new money optimism. Even though the hedge is related to the 2014 Notes, it is the manpulation from it that would relax (albeit temporarily as buying/covering pressure became too great). Obviously, the short-term battle at hand is the 2009 debt appropriation. With no debt due in 2010, if they can work a little magic, that battle can be won while keeping the platoon in tact. And if that happens, there would a cease fire/respite for the time being and would allow the company (and it's common investors) to catch their breath. Since the buyout in late July, neither have really had a minute to breath clean air--it's been nothing but smoke.

I agree with you 100% that this is a formidable war they are in. And the end of which potentially will not be determined until 2014. Between 2013 and 2014, they have something like 1.5B+ of debt due. As you say, the next few years will also determine whether SatRad really is "just a luxury" or will it become more mainstream. At the moment, I see many organizations leaning toward the latter. CNBC adresses their SatRad listeners from time to time, they are a big presence in all major sports (as in the Chicago Winter Classic @ Wrigley I attended), et al. Yes Autos are contracting, but keep in mind, the company's saturation in all Autos is only 50%. Even if Autos contracts another 25% (which would be next to armegeddon..more like 10%), if SIRI's saturation increases 10% into their extra 50% metric headroom, it will at least offset that volume decrease. But the fact that they have such carpet exposure to Autos (where consumers mainly still listen to the radio), it at least keeps them stable until they can grow the "portable" side of their business model (and hopefully put their vast bandwith spectrum to work further). So my take is they are not as badly positioned right now as some might think.

All your points about BOD feduciary to the survival of the biz, valuing talent/sports contracts, the plight of potential protracted economic downturns, et al, are all valid and I agre 100%. None of us know exactly how this year or the next few will play out. I like your analogy of the infantry. Loser dies but winner gets to fight another day and keep from being the next loser. That's the mentality we all have to have. We can do two things: give up and say we've had it and let the enemy have at us at will, or we can keep fighting and survive until we win. Then we never wind up playing the part of the loser. I hear a lot of people these days saying, "that's it, we're cooked, it's over, hands up I quit...". When exactly did the U.S.A. adopt that new motto? The only motto I've ever known is things get tough...but when they do you fight like hell to make it right (or less wrong to x degree...as nothing is absolute or perfect). That's what I plan on doing in the face of economic trouble and I hope more people will do the same rather than just say, "it's real bad, the world is over, I'll be locked in my closet if you need me". I sense SIRI will do the same. They owe it to themselves and all parties concerned to fight this until they can't anymore. Hey, it's easy to file. All you have to do is get a case number, right? And poof, all my debts are gone! But that's the easy way out. I see that as the ABSOLUTE last resort for this company...and I see plenty of ammo still in their shed. I hope they will use it all. You might call me unrealistically optimistic. But truth is, America took the same stance in the early 40's...and I'm sure we're all glad that was the case or this world would be mighty different today. Going down fighting (while still spraying bullets with finger on the trigger) is always better than just giving up because things look bleak...IMVHO...

Jan 12 12:42 PM

[sl62:]

btw...

3Mo Libor is 1.16 today. I've heard predictions of under 1% sometime this month. This helps ARMS, HELOCS and borrowing of any kind (including corporate!)...

Jan 12 12:48 PM

[Timmothy Posey:]

The problem with CC is that they have a flawed business model. Don't forget about 2 years ago when they fired all of their sales employees, only to hire brand new ones at about half the wages. Of course now with no incentive to do well (including the removal of sales commissions), the new employees floundered about the store and didn't help anyone. Sales dropped. Oddly enough, they also allowed those former employees to re-apply for their new positions at a much lower hourly rate. Many of the former employees took to the airwaves and Internet (Slashdot and many other popular blogging sites) to organize a boycott against CC. Those 3,400 fired employees have pretty much brought down the entire company with a very successful boycott.

What's interesting to note is that CC usually has similar pricing to Best Buy (they even have a Price Match Guarantee), but is it any wonder why consumers flocked more to Best Buy rather than deal with turd-heads at Circuit City? Hint: It wasn't because people like the Best Buy blue colors.

Lesson of the story: You reap what you sow.

www.washingtonpost.com...

Jan 12 04:36 PM

[sl62:]

TPoise...

Thanks for that info. I never knew that. But I can certainly verify. I went into a CC in December to hopefully get a deal on a mouse and the people working the store were very funky. I walked out, (not knowing they were replacements) saying to myself, no wonder they went BK. Too bad. CC used to be pretty good back in the early 2K's. I bought a custom-built Compaq through their in-store kiosk at the time. Good times gone bad. And just goes to show how unpredictable the market can be. Today they closed @ .33 in the Pinks as a company with a case number. Plenty of people betting on that sale of themselves. But here SIRI is not in BK but with just the threat of it over them and they closed today @ .13. Funny stuff!

Jan 12 09:47 PM

[good guys:]

past business model retail consumer electronics is dead.
No one wants service or is willing to pay for it. Its all about the lowest cost.
All the info on products is available on the web.
The future of CE is Walmart and the internet.

Why would someone want to invest in a bleeding model?
Lets ask CompUSA.....oh, cant they sunk right after they sunk Good Guys.

Jan 12 10:16 PM