For well over a year, Sirius XM Radio (SIRI) has been discussing its growing Cash Balance and increasing Free Cash Flow. While it battles with Liberty Media (LMCA), its largest shareholder about control of the company - as evidenced by the dueling petitions before the FCC - at least Sirius XM has finally announced a use for some of that cash. Specifically, the company recently announced a plan to pay off the 9.75% Senior Secured Notes due 2015.
These notes will be called at 104.875% of face value plus accrued interest effective September 1st. The total face value of this debt issue currently outstanding is $186,112,000. This is certainly good news for investors since it will remove more than $18 million per year in interest expense and is a use of cash that is earning extremely little in the current low interest rate environment.
The announcement is not entirely unexpected since Sirius XM CEO Mel Karmazin discussed debt reduction during the first quarter conference call when he said:
We believe that a good use of our cash, certainly, would be to return capital to our shareholders. We've said that before, nothing has changed. ... So we will continue to be opportunistic as debt is offered to us for us to reduce our more expensive debt. As we are sitting with the cash, we're not getting very much interest, obviously, on that cash. And by retiring some of the debt, as David talked, about makes really good sense for our investors to do while we continue to build up cash in a significant way to consider returning capital to shareholders when the Board makes that decision.
It should be noted that the call premium of 4.875% will cause a $9 million charge to earnings in the third quarter, partially offset by a $1.5 million reduction in interest expense. Obviously, with well over 6 billion diluted shares, these numbers will not impact the Diluted EPS. Even the eventual $18 million in annual savings is unlikely to move the EPS needle (except in certain rounding instances), but it is still good to know that management is working towards eliminating some of its high coupon debt.
Use of Cash
The Sirius XM balance sheet is no longer the disaster it was when the company was on the brink of bankruptcy in February of 2009. In fact, on the last conference call, CFO David Frear stated, "We finished the quarter with $747 million in cash. Net debt to EBITDA improved to 2.9x from 3.1x at year-end." This leverage ratio is below the 3x target Karmazin felt was a good level for Sirius XM to maintain.
As Karmazin noted above, there is a desire to return cash/capital to shareholders. In the past he has also indicated his preference for a share buyback over dividends, believing it to be a more tax efficient method. And, Karmazin has repeatedly stated that there are no accretive acquisitions available for the company.
As a result, it has frequently been speculated that Sirius XM, either on its own or at the direction of Liberty, would begin using its cash for a share buyback at some point. Currently, Sirius XM would be unlikely to begin a re-purchase program since it will increase Liberty's ownership percentage, potentially driving Liberty Media to majority control.
My personal preference is for a company to reinvest excess cash in the business for future growth or pay a dividend. Apparently Sirius XM management does not see significant internal opportunities or accretive acquisitions and dislikes the idea of a dividend. And, since share buybacks at this time are off the table due to the complicated situation with Liberty, the company is apparently left with only the option of debt reduction.
It's not the worst use of cash, especially when that debt carries a 9.75% coupon rate.
Disclosure: I am long SIRI.
Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, at any time. I have no positions, or any plans to open positions in the next 72 hours, in any of the other companies mentioned in this article.