Sirius XM (SIRI) announced today that it will officially retire over $750 million in notes that were due in 2015 at an interest rate of 8.75%. With the proverbial stroke of a pen, the use of some cash on hand, and foreign financing at a more attractive interest rate of 5.75%, the company has just dramatically improved its cash flow.
The 8.75% notes had an annual carrying cost of nearly $66 million, or almost $5.5 million perm month. The new refinancing of $600 million will have an annual carrying cost of $34.5 million, equating to about $2.9 million per month. The implied monthly savings is in the neighborhood of $2.6 million. That can help free cash flow in a very positive manner, and is a clear demonstration that Sirius XM is in the proverbial driver's seat when it comes to its debt picture.
The only real debt issue that eludes Sirius XM control is the "toxic" convertible debt due in 2014 at an interest rate of 7% that can convert to about 273 million shares. The company offered up a premium to try to retire that debt when there was a change of control due to Liberty Media (LMCA) going over the 50% threshold, but very few bond holders jumped at the premium. Liberty Media does hold about $11 million worth of these bonds. Im addition, Liberty Media is in for a bit of a payday of sorts with the current debt retirement, as it holds $150 million worth of the 8.75% notes.
At the end of last quarter the company had cash and cash equivalents totaling an impressive $652 million. This is even more impressive when you consider that during the second quarter the company used about $650 million to repurchase 195 million shares of stock.
The media sector is all about free cash flow and EBITDA growth. Sirius XM is hitting on all cylinders when it comes to both of these metrics. The company still has about $700 million worth of share repurchases planned, and it is anticipated that the buyback program will continue well beyond the already announced $2 billion. Added free cash flow from events such as smart refinancing simply reinforce the notion that the company can accomplish some impressive things due to its excellent position in the market.
On the risk side, Sirius XM is approaching challenging areas when it comes to valuation. At this point investors need to make assumptions on next year's free cash flow and EBITDA growth to fit into valuation multiples that are comfortable. Savvy investors are right now modeling for next year. At this point, even with conservative assumptions, the story looks quite promising. This equity is sensitive to the macro-economic news flow, so bear that in mind. Stay Tuned.