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Much Ado About Nothing

Today I received a very kind letter from one of my readers. This one however is especially important to me as I have been blessed with 3 healthy children and 3 grandchildren so far, with another on the way. This last line stood out to me:

"I am hoping that Sirius XM will survive the battle of the "greedies" because at Oncology Kids we could use the returns on our investments. We plan to expand next year to provide assistance to families of children with cancer."

I have been extremely concerned the past few days and have given readers a bit of an insight into the often manic manner, in which I think through a problem. I have eluded to the possibility of further dilution down the road, as a result of Sirius XM's filing of their intent to ask shareholders to authorize a 1 billion share increase, to their already sizeable 8 billion authorized shares.

The one nagging thought in my mind has been; Why?! Why would a company with so many shares already authorized, seek to increase that number if it were not already a foregone conclusion that it would use those existing shares. I have speculated that it could have been to try to undo the Liberty deal to mixed reviews. It was just a thought. I have yet another viable explanation that I would like to throw out there for my critics to mull over.

Sirius XM currently has nearly 4 billion shares outstanding of the 8 million authorized. According to the deal with Liberty, Sirius XM must keep on hand all of the approximate 2.5 billion shares that represent Liberty's conversion to equity, when and if it should ever happen, and which can occur at any given time. The dilution effect of these convertible preferred shares has long ago been factored into the price of Sirius XM common stock.

A quick look at the math reveals that 6.5 billion of the 8 billion authorized shares is already in use. This simple truth had bells and whistles going off. There are only 1.5 billion shares left to use in future equity offerings. That may sound like a large number to many, but bear in mind that shareholders have already approved a reverse split that ranges from 10 / 1 to as much as 50 / 1.

The company is seeking shareholder approval to delay the reverse split until next year. A reverse split would mean that Sirius XM would have a "post-split" arsenal of only 30 million shares up to as many as 150 million shares. Suddenly that original number does not seem very large. If Sirius XM is to grow into new venues, most of which at this point remain un-invented, it will need to raise equity on occasion to finance special projects.

The point of this lengthy analysis is that Sirius XM does not necessarily have to dilute shareholders at all at this point in time, but to increase the authorized share count may again prove to be a good thing, well into the future.  I hope I'm right on this, but if I'm not, perhaps the management team at Sirius XM could just send those kids a little something?

Position: Long SIRI