Click on the banner to learn more...

Sirius Satellite Radio (O:SIRI) has cut a recapitalization deal that will leave it debt free and with $440M in cash, which it says will fund operations into Q2 of 2004. But as part of the deal, current Sirius shareholders will be left owning only 8% of the company.

The deal that Sirius announced yesterday afternoon (10/17) will have holders of its bonds and other long-term debt exchange that $700M in debt for 62% stock ownership. Holders of $525M of Sirius' preferred stock will exchange those preferred shares for 8% of the company's common stock.

The remaining 22% of equity ownership will go to three investment groups who are investing $200M in new cash - - which along with $240M already on hand will give Sirius its pot of gold to fund operations for the next year and a half or so. The biggest investment, $150M, is coming from the Oppenheimer mutual fund group. $25M each will come from Apollo Management and The Blackstone Group. All are already major Sirius shareholders. Oppenheimer currently owns 10.7% of Sirius, Apollo 11.1% and Blackstone 8.3%. According to Sirius officials, the investment deal values their new stock at $1.22 per share - - well above the 10/16 closing price of $0.84.

The company's next-largest shareholder, former CEO David Margolese, will see his 7.8% stake diluted to 0.624% and all other existing shareholders will suffer similar dilution.

News of the recapitalization was well received on Wall Street, where Sirius' stock price rose $0.48 to $1.32. Sirius had recently announced (10/14 RBR Daily Epaper) that it had skipped a $750K bond interest payment because it was renegotiating its finances with its major debt holders.

In a conference call with analysts, CEO Joe Clayton called the refinancing a "major milestone" for Sirius, but also admitted that the company is reducing its subscriber expectations for the near term. He said subscriptions, which now total about 14K, are having growth slowed by a variety of factors - - "the soft retail marketplace...the lack of a plug-and-play unit" [which competitor XM has]...a slower than anticipated roll-out of receiver brands...and what he termed "misleading articles in the press." He particularly cited one Reuters report "which implied that the end was eminent - - I guess we put that one to bed today," Clayton said.

Sirius is now projecting that it will get to 400K subscribers in 2003 - - with one third of them coming from its deal to have its receivers offered on cars made by Ford and its related companies. With the new recapitalization and investment, the company projects that it will need about $75M more to get it to the point of cash flow break even in Q1 of 2005. With no debt on its books, that shouldn't be hard to raise, but Sirius is also hoping to reduce that $75M figure through some internal cost savings.

The recapitalization announced yesterday won't take effect until it's approved by a majority of Sirius shareholders. It's also dependent upon 97% of the company's debt holders agreeing to the debt-to-stock conversion. The company said parties holding about 75% of its debt were involved in the negotiations and had endorsed the plan.

RBR Observation:

This rosy financial outlook all assumes, of course, that Sirius can get to the 4M or so subscribers that it needs to break even by Q1 of 2005. That's 3,986,000 subscribers to go, or 285 times the number of subscribers it currently has. If you have money in Oppenheimer's mutual funds, you're betting it will happen. That's not a bet we'd want to make.