Goldman Sachs analyst Mark Wienkes dares to raise the question of the “viability of the current business model” in his latest missive to clients on Sirius XM. The satellite radio company remains on his “conviction sell” list, where it has been for a long time.
Wienkes issued his latest analysis after the company filed the proxy for its annual shareholders meeting, calling for a reverse stock split and authority to issue many more shares to raise equity. See related story. [LINK] “One interpretation is that this could just be prudent move by the board in case refinancing the 2009 debt maturities is not viable. An alternative view is that these potentially benign proposals are harbingers of pending certain equity dilution. The proposals seem to run contrary to CEO Mel Karmazin’s 2Q08 conference call commentary ‘we have no plans for a reverse split.’ That said, times change and the proposals are unsurprising given +$1bn of 2009 debt maturities and difficult credit markets set against a business model that is still consuming cash,” Winkes told clients.
With Sirius XM needing to refinance $1.05 billion of debt in 2009, the analyst thinks the most likely outcome is another round of dilution for shareholders, either from more costly borrowing, new equity issuance – “or both.”
Even though the company’s stock price has fallen dramatically this year, the Goldman Sachs analyst says the equity valuation is still overstated relative to free cash flow. But that’s hot all that has him worried: “however, with a now weaker consumer outlook and essentially closed credit markets, the nature of our concerns has shifted toward the viability of the current business model set against +$1 billion of debt maturities and an uncertain amount of cash on hand. 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,” Winkes said.
RBR/TVBR observation: We have questioned since the 1990s whether satellite radio had a viable business model. Rather than being the year that Sirius XM achieves positive EBITDA for the first time, 2009 could prove to be a year where the company is fighting for survival.
RBR/TVBR note: More see Mel ‘ZenMaster’ changes course