Shares of Sirius XM (NASDAQ:SIRI) closed higher last week by almost 4% to $3.24, beating the Nasdaq's 1.2% gain. But investors were on the edge of their seats as the week began. Recall, last Monday Sirius shares fell below that all-important $3.00 mark to make a 52-week low at $2.98. So things started off pretty rocky.
All told, since bottoming out at $2.98 the stock surged as high at $3.26 for a 9% gain before settling at $3.24. Suffice it to say, there is never a dull moment in SIRI-land. But if the stock was a bit less exciting, I believe investors would be gainfully rewarded. And this is why Sirius, which trades 70 million shares per day, needs to execute a reverse stock split.
Last week, aside from the news that Sirius and its parent company Liberty Media (LMCA) completed their previously agreed upon stock purchase transaction, the big news was Sirius raising $1.5 billion in new debt. Now, we knew the company needed to do this to fund (among other things) its ongoing share repurchase program. But $1.5 billion was much larger than anyone expected.
Recall, Sirius (only) needed to buy back 93 million shares from Liberty for an estimated $340 million, which left Sirius with $1.7 billion on its buyback authorization. While the difference from the $1.5 billion might seem like a lot, Sirius generates another $1.2 billion in operating cash flow. So although there are other considerations, it's not as if Sirius was strapped for cash to execute the buyback. At least not to the extent it needed more than, say $1 billion in new debt.
Now this circles back to the effectiveness of the share repurchase program, which, along with a special dividend, was first announced in December 2012. On the day of the announcement, Sirius stock traded as high as $2.85. Sirius then announced a $1.25 billion credit facility to fund its $2 billion buyback program. At the time, the press release read as follows:
Sirius XM Radio announced that its Board of Directors has approved a $2 billion common stock repurchase program. Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions. Liberty Media Corporation, the beneficial owner of approximately 49.8% of the Company's stock, has indicated that it will participate in the Company's share repurchases on a pro rata basis so that its relative ownership interest will not be affected by the program. The Company will fund the repurchases through cash on hand, future cash flow from operations and borrowings under its revolving credit facility.
Liberty eventually raised its stake in Sirius to 53% to become majority owners. Then almost a year later, Sirius announced an additional $2 billion buyback, which, in my opinion, it didn't have to do. At the time, Sirius also announced that it would purchase $500 million of common stock from Liberty and its affiliates.
It wasn't then clear what the terms would be. But the press release said that the price would be at a discount to the volume weighted average price of the common stock during a period following the release of the Company's earnings for the third quarter. Note, this was back in October 2013. We eventually learned that the purchase from Liberty would be done in three installments - the third of which was just completed last week, as stated above.
Now, after almost two years of these buybacks and corporate maneuvering between Sirius and Liberty, it has to be disappointing that these shares are only up 13% since the initial buyback program was first announced. Now I'm only talking about the period of December 6 2012 to last Friday's close. I know full well that Sirius had reached a 52-week high of $4.18. I also know that the stock traded at around $3.89 in January. But all that matters is where the stock is today. This is where the market values these shares.
Sirius, by its low price, continues to be a haven for traders. The company attracts a lot of attention, particularly from retail investors - many of whom don't really know what they're getting into. The volatility the stock has seen has been the results of a stock with majority retail ownership. This is why the stock has barely moved despite the company's extensive buyback program.
Not to mention, there is considerable bearish pressure hares as evident by the more than 233 million shares of Sirius that are sold short. This is a significant percentage of the company's float, which stands at more than 6 billion shares as of Friday. This is why the buybacks have not made a dent. It's not because Sirius is a bad company. It's not because the market hates Sirius. Sirius has hurt itself by diluting shareholders.
If the company were to execute a reverse split of, say 1-for-5, Sirius stock, which closed at $3.24, would then trade at $15.24. This would also drop the float down to a little more than 1 billion shares outstanding. Note, the reverse split doesn't fix anything internally with Sirius. Whatever fundamental problems there were before the reverse split is not going to go away. So I won't say that the higher share price will get rid of the shorts.
What I do know, however, is the fact that Sirius trading at a higher share price immediately makes the stock more attractive to institutional investors, while at the same time getting rid of weak-handed retail investors - particularly those that have looked to Sirius only to a trade penny movements. What's more, Sirius would suddenly become "boring." And investors with long-term horizons who have become annoyed by the volatility can finally be at peace with a company that is executing its business without constant worries of the share price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.