Sirius XM Holdings (NASDAQ:SIRI) has been very busy in the past few weeks. Recent events included:
- On September 24th, the company announced its proposed acquisition of Pandora Media (NYSE:P) in an all-stock transaction.
- On October 9th, it announced that it would be increasing the quarterly dividend by another 10%.
- On October 11th, Sirius announced that it had acquired PayTollo.
Each of these events will have an impact on cash flow and should contribute to a rather lively earnings conference call on October 24th. This article will look at each of these events and their potential impact on cash flow.
Even though the acquisition of Pandora has been proposed as an all-stock transaction, with an exchange ratio of 1.44 shares of Sirius for each share of Pandora, there will be cash flow implications. While I intend to try and quantify some of the negative cash flow impacts, investors should be aware that even if the proposed acquisition falls through, there will be cash flow implications.
Pandora's 8-K filing discusses a termination or break-up fee under certain conditions:
The Merger Agreement provides certain termination rights for both the [Pandora] and [Sirius], including the right of the [Pandora], prior to the adoption of the Merger Agreement by the [Pandora] stockholders, to terminate the Merger Agreement in order to enter into an agreement with respect to a superior proposal, so long as the [Pandora] complies with certain notice and other requirements set forth in the Merger Agreement. In connection with any such termination and under other specified circumstances, the [Pandora] must pay [Sirius] a termination fee of $105 million; provided that if, subject to specified limitations, the [Pandora] terminates the Merger Agreement to accept a superior proposal with an Excluded Party by 11:59 P.M. (New York City time) on November 22, 2018, the [Pandora] will pay [Sirius] a termination fee of $52.5 million.
And if the acquisition does not receive regulatory approval, there will still be fees for the financial and legal advisors.
Assuming the merger is completed, there will be other cash flow implications. These include:
- Incremental dividend payments on approximately 430 million additional Sirius shares. At the current dividend rate of $0.0484 per share, that would be ~$20.8 million/year.
- Loss of the 6% dividend on the $480 million of Pandora preferred shares that Sirius currently holds. A loss of ~$28.8 million per year in income that would flow straight to free cash flow.
In addition, the announcement of the acquisition resulted in a large decline in the share price of Sirius. This would allow the company's share buyback program to ramp up. On the last quarterly conference call, Sirius CFO David Frear answered a question about the slowing pace of the buybacks:
... it's the toughest thing we have talked about in the quarter is that the - we had outstanding stock performance, and it ran through our grid. It's kind of like a first-world problem. But that's exactly what it did that there was a - we had a big event in December with the tax law change, and we revised the grid to reflect that, bought a lot of stock between the passing of the tax law and the time of the earnings call. And we revised the grid, again put it into places we - as we went into the second quarter. And honestly, the performance of the stock just caught us flatfooted. And it's not one of these things where you yank the grid back every time the stock goes on a run. And so, we've had great performance in stock. We're thankful. We continue to think that the stock is good value and so that's what it is.
The week before the Pandora announcement, the shares still traded as high as $7.15. In the week following the announcement, they traded as low as $6.15. That steep decline in share price should have created a significant buying opportunity, and the overall weakness of the market so far this month would have added a further buying opportunity for the company.
Last week, the shares hit their lowest point since mid-February, trading as low as $5.95. It would be shocking if there wasn't a significant increase in the repurchase of shares following the announcement and right up through the release of earnings.
As of July 23rd, Sirius had 4,488,104,672 shares outstanding. That number has most likely declined as a result of the ongoing share buyback program, although the decline would be partially offset by any new shares being issued as a result of the conversion of stock options or issuance of restricted stock units. At any rate, the increase of the quarterly dividend from $0.011 to $0.0121 would result in an annual increase in dividend payments (and use of cash) of just under $20 million per year.
When Sirius announced the acquisition of PayTollo, there was no information given about the size of the business or its purchase price. And it's probably not worth the effort to try and determine any of the financial aspects of the company. It's unlikely that the acquisition was accretive, since accretive acquisitions are typically described as such in press releases.
What I can share is that the company was headquartered in San Francisco and its product is a smartphone application that allows users to pay tolls more efficiently. In that respect, it would be similar to E-ZPass, which is used by 17 states, where users attach a transponder to their windshield or licence plate and can go through special high-speed toll plazas or cashless toll booths.
Unlike my experience with E-ZPass, where a transponder is used to record movement through the toll plaza, there are other competing apps that can be used in Florida. The only locations mentioned on the PayTollo website appear to be five of Florida's sixty-seven counties and Orange County in California. As it turns out, Florida claims to have more miles of toll roads than any other state.
The 10% increase to the Sirius dividend - less than $20 million per year - is less than the $28.8 million preferred stock dividends the company will lose if the transaction to acquire Pandora is completed. Somewhat larger than the increase in the Sirius common stock dividend would be the incremental dividends on the newly issued shares to complete the Pandora transaction. And it is my estimate that the total cost of the PayTollo transaction will be dwarfed by each of these figures.
However, the sharp drop in Sirius share price has probably created a significant buying opportunity for the company. Since the announcement, there have been more than half a billion shares traded, or, more than twice the average daily volume for 2018. And if Frear thought that "the stock is good value" back in July, when it was trading in the low $7 range, he should have been buying a lot of shares following the announcement.
Disclosure: I am/we are long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Although I have a small long term position, I am currently more in the mode of regularly trading large blocks of Sirius. I will continue to so and will occasionally sell covered calls against these short term long positions.