A lot has been written about Sirius (NASDAQ:SIRI) and a lot of it tends to either be wrong; you really have to wonder about the biases of the authors. So as a quick 'street cred' -- besides holding stock in Sirius Satellite Radio in my personal portfolio, I used to run the International Space Business Council, currently manage stock indexes (including that used for the Powershares Aerospace & Defense ETF (NYSEARCA:PPA)), and worked for a venture capital company that invested in several space-related ventures. So, I've read and been around the sector for more than 20 years in a variety of capacities.
So with what happened last week between Liberty's (LMCA) filing with the SEC and Sirius' counter-filing, I wanted to figure out off-the-cuff, how much exactly Sirius would be worth in an acquisition.
Were the company to close its doors today, an acquirer would receive spectrum rights valued at $5 billion and $7 billion in net operating losses [NOL]. With the current market cap at $8 billion, this brings us to $20 billion, but the question is...is Sirius worth $8 billion?
The company is expected to start generating in excess of $1 billion annually in free cash flow [FCF]. I'll use a fixed $1 billion to keep my numbers simple. As an independent firm, SIRI is in a scenario in which it sees a third of FCF going to dividends, a third toward a development fund to upgrade future satellites and ground networks and expansion and a third going to a share buyback or other corporate activities. The $333M payout for the 3.88 billion outstanding shares would cost roughly 8.6 cents and provide a 2.86% dividend yield, with the stock at $3 per share (a reasonable dividend level at a share price at a premium 25% higher than its recent close). Without factoring in any growth whatsoever, an $8 billion valuation is justified. If one used part of the remaining 33% of FCF to buy back stock, the dividend yield would rise and a $5 per share price is possible.
Were an acquirer to purchase the firm outright at $20 billion, they'd pocket the full $1 billion in FCF. Even allotting a third to future satellites and ground networks, they'd be able to pocket $670 million a year, the equivalent of a 3.3% dividend on their investment. Not the best return, but one which doesn't factor in any element of growth over time above a FCF of $1 billion per year. At $1.5 billion in FCF and setting aside $200 million annually for the satellite fund, and the yield rises to 6.5% per year. At $2 billion in FCF, you're at a 9% yield.
All this is based on a $20 billion valuation. With 3.755 million shares outstanding, you get a price of $5.33 per share. Discounted by 10%-12%, and you reach a buyout price $4.69- $4.79.
The above is obviously all rough estimates, but based on comments throughout the blogosphere, I believe that this level would be acceptable to investors. The longer Sirius exists as an independent operation, the more likely it is that the remaining third in free cash flow would be applied to share buybacks. With fewer shares outstanding, if the yield is kept around the 2.86% level, you could see the stock rise to $8. Still, that would take several years, and I know that I likely would have sold most of my position by then.
Disclosure: I am long (SIRI).