Sirius XM: Important Reason Found For Massive Short Increase In Q2 Report

Jul.31.14 | About: Sirius XM (SIRI)


Sirius XM's short interest rose by a large amount in May of 2014.

Until Sirius XM's Q2 report the question of "why?" was left unanswered.

Thanks to Seeking Alpha reader "denco1" the answer has been found.

Back in June of 2014 when NASDAQ short interest was released for Sirius XM's (NASDAQ:SIRI) end of May settlement date, I wrote an article noting a very large 56% increase in the short position in the company.

The previous data point, 197 million shares sold short, was extremely low, especially considering the large number of shares outstanding of 6.03 billion. A little math shows that is only approximately 3.25% of outstanding shares sold short.

... typical values for Sirius XM's short interest adjust by an average of 20 million shares or so every two weeks. The most recent data point, though, shows that shorts added to their positions by a whopping 111 million shares (rounded), which is nearly 2% of the outstanding shares. Furthermore, when considering shares not held by controlling majority holder Liberty Media (NASDAQ:LMCA), these shares sold short are about 4% of the total, and if one removes shares held by institutional investors, these shares sold short are about 8% of the total retail float.

Until now it was not wholly known if this short position was a direct bet against the share price of the stock, a short against a long position such as the one underlying the often discussed convertible bonds due in December of this year, or "something else" that would not fall under either umbrella.

Thanks to Seeking Alpha reader "denco1" the answer to this question has been answered in part. Note his comment on my most recent article discussing Sirius XM's Q2 call, as well as Jack10000's response to him :

Interesting from the 10Q...not sure if someone already posted this.

From the 10Q page 45

What is an ASR agreement? Looks like it is similar to what Liberty did when they were buying shares with the forward contract. They have received an INITIAL amount of 112.5mn shares. They are to receive more in August. We don't know what the negotiated price was per share.....therefore no price per share on the 10Q.

These shares have been paid for with the 600 mn up front payment.

"In May 2014, we paid $600 million under an ASR agreement and received an initial delivery of 112.5 million shares of our common stock. The
ASR agreement is expected to mature no later than August 1, 2014 and will settle following maturity. See Note 14 to the consolidated financial
statements included in this report. In addition, during May 2014 we purchased 68.2 million shares of our common stock on the open market at an
average price of $3.21 per share."

looks like maybe another 50mn or so shares already paid for in up front in Q2 that will come off the books August 1st, Q3.......tomorrow. -denco1


Seems they paid $354.4 million for the 112.5 million shares, or $3.15 per share according to Note 14. This accelerated program ends tomorrow, assuming it has not already been completed earlier this month. Assume nothing was done in June under this program or it would have been reported. -Jack10000

What is an "ASR"? It stands for "Accelerated Share Repurchase" agreement and is defined as:

A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase 'ASR' is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company. The shares are returned to the client through purchases in the open market, often purchased over a period that can range from one day to several months.

What happens is that a company which is buying back its own stock, such as Sirius XM, enters into an agreement to buy a certain number of shares at a premium to the current share price. The company pays for these shares up front, in this case $600 million, and receives stock either immediately or over a defined period. In this case, 112.5 million shares were delivered immediately with the rest to be delivered on August 1st of 2014.

Because an ASR is filled through shares being "borrowed" the disbursement will show up in the short interest of the company until or unless it is covered either through open market purchases or private transactions. Because short interest has not moved significantly to date, currently sitting near 300 million shares sold short, it is reasonable to assume that these shares have not yet been purchased in the open market.

Two conclusions can be drawn here, but one is the most reasonable.

The first, which is highly unlikely, is that the other party fulfilling the ASR has not covered its short position and therefore is presently in need of a 112.5 million share cover at prices much higher than the $3.15 strike on the ASR. This would mean that part was currently running a $33.75 million deficit on the shorted shares.

The second, and more probable explanation, is that this agreement was placed with the holders of Sirius XM's convertible bonds due in December of this year. 272.38 million shares are currently promised by these bonds when they mature on December 1st.

Because the holders of these bonds have a covering instrument, this gives them the ability to short the stock in the absence of any risk, and would allow them to enter into an ASR as described above with Sirius XM for such a large number of shares. While these are assumptions there is a very high chance that they are correct.

So what does all this mean?

Let's look at it in logical fashion.

  • Sirius XM has paid $600 million in an ASR and received, to date, 112.5 million shares at a cost basis of $3.15 per share.
  • The remaining shares under the agreement at $3.15 per share would then total 77.97 million additional shares to be delivered by August 1st, 2014.
  • Total shares purchased under the ASR should be 190.47 at a cost of $3.15 per share, although this may vary by several percent as the final cost per share is based on, as stated in the 10-Q : "The aggregate purchase price we will pay under the ASR agreement will be determined using a pre-agreed grid that references the volume-weighted average price "VWAP" of our common stock, and the total aggregate number of shares to be repurchased under the ASR agreement will be determined based on the VWAP of our common stock minus a discount during the term of the ASR agreement."
  • Since the original short from May has not been covered, it is reasonable to assume the other party in the ASR is hedged.
  • Sirius XM's outstanding convertible notes due December 1st 2014 would provide the most reasonable hedge.
  • Instead of converting the shares and selling, by holding the notes and entering into an ASR, the note holders retain the ability to collect the final two interest payments, paid June 1st and December 1st, and retain their 7% rate.
  • Simple math shows that if these assumptions hold true, 81.91 million shares would remain promised under the notes.

This may assuage some concerns that in December Sirius XM would issue 272.38 million shares to note holders who would then seek to immediately sell those shares into the market, causing significant selling pressure and a decrease in the share price of the stock. The other line of thinking is that holders would seek to short leading up to the conversion date, again causing selling pressure in the market. Because this position would be effectively nullified by 70% or more, the assumed impact should be significantly less than concerns may warrant.

There are a few other things investors should consider when looking at this. Keep in mind that these are speculations and are not sure things.

  • Because Sirius XM has paid for but not received all shares promised under the ASR, it may appear that Sirius XM has exhausted a larger portion of its buyback for fewer shares than have actually been repurchased.
  • With the remaining shares to be delivered on August 1st, these will appear in the Q3 report.
  • Because these shares may have been repurchased in an agreement with a debt holder, this may free up additional borrowing capacity and effectively reduce Sirius XM's currently stated levels of leverage.
  • With Sirius XM's recently announced $2 billion extension to its current buyback program, an agreement like this and the effective reduction in leverage it may provide could allow for the company to borrow additional funds and remain under its target for 4X leverage.

Again, these are assumptions, and there are no guarantees that if Sirius XM has "repurchased" this debt in a roundabout fashion by entering into an ASR with the debt holders of the convertible notes that the ratings agencies would be forgiving on a slight excess of 4X leverage on paper, but it is a possibility.

The way I look at all of this is simple. This is a good move by Sirius XM, regardless of assumptions. The company was able to secure $600 million in shares at what appears to be a very good price of $3.15 per share compared to today's pricing of $3.45. If this repurchase is from the shares underlying the bonds, it should mitigate or eliminate concerns surrounding the bonds' maturity in December, as the "short" by the fulfillment party in the ASR would be covered by the shares. Investors should expect to see another large jump in short interest when it is disseminated on August 26th after market close for the period between August 1st and August 15th in relation to the final lot of shares being delivered to Sirius XM.

These shares are bought and paid for. Another 81.91 million shares, at least, should be removed from Sirius XM's float on August 1st, and this bodes well for the coming Q3 report. Keep this in mind going forward, and watch the share price over the coming weeks.

Disclosure: The author is long SIRI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long SIRI January 2015 $2.50, $3, $3.50 calls. I am long SIRI August 16 $3.50 calls