Goldman Sachs analyst Mark Wienkes has once again cut his target price for Sirius XM, to 25 cents from the previous 50. The analyst sees “near-certain dilution” for shareholders as the satellite radio company refinances its capital structure. Wienkes is also worried about the satellite radio business itself, with receiver demand deteriorating and high costs to battle subscriber churn.
Wienkes has had Sirius XM on his “conviction sell” list for some time now. In cutting his target price yet again, the analyst said he expects the satellite radio company to either cut its 2008 subscriber forecast or miss the mark. He’s also lowered his estimates of free cash flow to equity and sees current shareholders facing dilution as the company struggles ro refinance over $1 billion of debt coming due in 2009.
“We believe that Sirius XM Radio’s inability or unwillingness to have previously refinanced its capital structure is now unlikely to preserve much, if any, equity value. Equity holders are facing near-certain dilution via either higher interest charges or new share issuance, as seen with the recently authorized approximately 67 million share exchange for $30 million of the $300 million convert, approximately 3% of the debt set to mature in 2009. If Sirius XM were to refinance just the remaining $670 million convertible offerings with stock, it could imply approximately 1.47 billion incremental shares or approximately 50% equity dilution,” Wienkes told clients.
Although the share price has fallen around 88% this year, Wienkes remains convinced that the equity valuation is still overstated relative to the company’s expected production of free cash flow to benefit shareholders. He’s now concerned about the viability of the business model as the company faces that big debt refinancing. “Specifically, we believe the current business model will have an increasingly difficult path as the cost of churn impairs the ability to generate free cash requisite to satisfy debt maturities or ultimately accrue any meaningful value to shareholders,” he warned.
RBR/TVBR observation: If, unlike us, you think subscription-based satellite radio is a viable business for the long term, there could still be an investment opportunity ahead. If all goes well, Wienkes sees an opportunity to buy the stock cheaper than today in about four years, just before Sirius XM starts producing free cash flow for shareholders. That is, we caution, if the company is around then. We wouldn’t bet on it.