So will we buy assets with our excess cash? Perhaps, but we haven't seen anything yet that's worthy of any meaningful investment or acquisition.
Mel Karmazin, Former Sirius XM CEO
February 15, 2011
Though we regularly look at potential acquisitions, we do not believe there are any missing pieces to our puzzle. So acquisitions appear to be unlikely for us.
Mel Karmazin, Former Sirius XM CEO
November 1, 2012
We have plenty of fire power to profitably invest in the growth of our business, consider accretive acquisition and continue our aggressive share repurchase program.
Jim Meyer, Sirius XM CEO
July 25, 2013
Free cash flow is absolutely one of things we look at. We look at EBITDA as well as revenue growth and how it fits with our base audio and data subscription business. So we've got a way of thinking here about the business where what we're really trying to do is drive the EBITDA and free cash flow to drive growing value for subscribers -- for shareholders. And so we're looking at additions to the business that we think can do exactly that.
David Frear, Sirius XM CFO
July 25, 2013
SiriusXM to Acquire Connected Vehicle Unit of Agero, Inc., the Leading Provider of Connected Vehicle Services
Acquisition Positions SiriusXM as the Leading Telematics Service Provider
Sirius XM Radio (SIRI) Press Release
August 15, 2013
For two and a half years Sirius XM investors have been hearing about how the company could use its growing free cash flow. The options that were listed were to pay down debt, or to return capital to shareholders through dividends, share buybacks or accretive acquisitions.
About one year ago the company aggressively began retiring its high interest debt. Then, last December, the company announced a one-time $0.05 per share dividend and a $2 billion share buyback. Frear recently stated that as of July 24, 2013 Sirius XM had "repurchased $1.28 billion of our stock, representing 391 million shares."
The announcement last week that Sirius XM would be buying the connected vehicle unit of Agero, Inc. addresses the fourth and final item about what to do with the company's growing free cash flow and cash balances.
Cash Projections For Second Half of 2013
As of the end of the second quarter, Sirius XM had a cash balance of $652 million and an undrawn $1.25 billion under its revolver. Those numbers will be changing rapidly over the remainder of the year. Listed below are some of the moving parts:
- Subsequent to the end of Q2, and prior to July 25th, the company spent $136 million on additional common stock repurchases.
- On August 1, 2013 Sirius XM issued $600 million of 5.75% debt due 2021
- On August 1, 2013 Sirius XM announced that it would redeem $753.487 million of its outstanding debt on September 3rd. The approximate cash cost for the redemption would be $835 million during Q3.
- On August 15, 2013 Sirius XM announced that "it has entered into a definitive agreement to acquire the connected vehicle services business of Agero, Inc. for $530 million in cash" and that the transaction was expected to close in Q4.
- Free cash flow has been guided to $915 million for the full year, with $237 million in Q2 and $142 million in Q1 having already been generated. That would leave guidance for the second half of 2013 at $536 million.
(Note: There would be some net interest expense savings in 2013 from the early retirement of the debt, but I expect that this will be more than offset by the fees for the redemption and new issue.)
So, if the company had $652 million in cash at the end of Q2, and has added $600 million in debt and will add $536 million according to its free cash flow guidance, the total available through year end would be $1,788 million. And, we know that at least $136 million has already been spent on share repurchases, $530 million will be spent on the acquisition and $830 million will be spent on debt retirement, or a total of $1,496 million of its current and projected cash has already been committed. That leaves a balance of only $292 million.
What's next for the use of cash? There is still the possibility of a satellite launch later this year, although that is currently on hold. Frear discussed this on the conference call:
And some of you may know on July 2nd, Proton experienced a launch failure on a Russian Government launch. The launch failure is under review and a report is expected in the next few weeks. As a result, the mid-August Sirius 6 launch will be delayed. A return to flight schedule has not yet been announced. We have plenty of in-orbit spare capacity and service to -- level to our customers will not be affected by this delay.
And while $80-$100 million for the launch may not be spent this year, the share repurchase program still had $0.7 billion remaining under the current authorization. This $0.7 billion may initially come from the revolver, but it is certainly reasonable to expect that Sirius XM will be once again be heading to the debt markets before the end of the year.
As of the end of Q2 the company had approximately $3.3 billion of long term debt. Adjusting for the debt repurchases since the end of Q2, the new $600 million debt issue and the $753.5 million debt retirement, a reasonable projection for long term debt at the end of the year would be $3.1 billion. How much should investors expect to see the company borrow?
Meyer discussed this on the recent conference call:
Our balance sheet remains underleveraged and both capital expenditures and taxes remain low for several years. We think over the long term, our leverage should be around 3.5x, and so should our Board decide it, we will have the capacity to continue returning capital to shareholders as our free cash flow grows and we move leverage to this target.
The company's EBITDA guidance for 2013 is $1.14 billion. At 3.5x leverage, that would indicate a debt level of just under $4 billion. And, with the adjusted debt at $3.1 billion, that could indicate a $900 million debt issue will be coming soon. Almost all of that would be needed to fund the company's remaining buyback authorization of $700 million and the satellite launch.
Very little has been disclosed about the acquisition from Agero. All that has been made available was in a very brief press release. Other than the $530 million price tag, we know that:
The connected vehicle unit of Agero is the leading provider of innovative telematics services, offering safety, security and convenience services for drivers and end-to-end, turnkey solutions for automakers. Following the acquisition, SiriusXM will provide connected vehicle services to more automotive manufacturers -- including Acura, BMW, Honda, Hyundai, Infiniti, Lexus, Nissan and Toyota - than any other telematics provider.
It would appear to be a strategic acquisition that will accelerate Sirius XM's mind-share in the telematics space and generate incremental revenue. And, since telematics has been emphasized as a future revenue opportunity for SiriusXM, this acquisition is appropriate. However, there are many aspects of the business that remain a mystery.
There is no mention about market share in either units or dollar volume. There is no mention about whether the division has been growing, and if so, at what rate. More importantly, from an investor viewpoint, there is no mention about whether the business is profitable and whether it will be accretive to earnings, EBITDA and free cash flow. This is somewhat surprising since many announcements about acquisitions by public companies are accompanied by a statement about whether an acquisition is immediately accretive or when it is expected to become accretive.
Investors should be enthusiastic about Sirius XM making an acquisition in the telematics space. Just over two years ago I wrote an article about share buybacks and my preferences about how the company should use its growing cash and expected future cash accumulation. The first two items on my list were:
- I would prefer the company use the cash to pay down debt.
- I would prefer to see accretive acquisitions.
Sirius XM has removed much of the high interest debt from its books and will continue to do so with the latest debt retirement. I'm somewhat less thrilled by the use of new debt to fund share buybacks, but that's the path the company has chosen. In that regard, investors should consider the impact of the Agero acquisition.
The amount of EBITDA and - to a lesser extent - the free cash flow that this acquisition brings to Sirius XM will play important roles in determining the amount of future borrowings by Sirius XM. Those future borrowings and free cash flow are expected to fuel the current and future Sirius XM share buybacks.
Clearly, the use of $530 million to pay for the acquisition is money that won't be spent on share repurchases in 2013. Until the company discloses the contribution and growth prospects of this soon to be acquired business, investors and the market will have difficulty assessing its short, medium and long term benefit and appropriately pricing the shares. And, until this investor learns more about whether or not, and to what extent, this acquisition is accretive, his enthusiasm will somewhat muted.