“We have no plans for a reverse split,” Sirius XM CEO Mel Karmazin declared in August, when the stock was still a bit above a buck. Now the company is asking shareholders to approve a reverse split of at least one for 10 and perhaps as much as one for 50. Not only that, but to approve a huge increase in authorized shares in case the company has to issue new equity to replace $1.05 billion of debt maturing in 2009.
A one for 10 reverse split would mean that a current shareholder of 100 shares would end up with only 10 shares. In theory the price would multiply by 10, but only in theory. Sometimes the market has other ideas.
If Sirius XM ends up going with the maximum reverse split, one for 50, the current owner of 100 shares would end up with two shares.
As it stands now, Sirius XM is authorized to issue up to 4.5 billion shares of stock. When shareholders meet on December 18th they’ll be voting to raise that to eight billion. That’s before the effect of any reverse split.
“To the extent we are unable to refinance our debt at maturity on attractive terms, we may choose to issue shares of common stock in satisfaction thereof. During 2009, approximately $1.05 billion of our debt is due to mature,” the company said in an SEC filing explaining the proposal to increase the number of authorized shares. Sirius XM said that while increasing the number of authorized shares could be seen as having an anti-takeover effect, the board is not aware of anyone contemplating a move to take over the company nor is their any plan to mount anti-takeover measures.
Issuing lots of new shares would obviously have a dilutive effect on current shareholders. Given that and Karmazin’s previous comments that no reverse split was contemplated, the Internet message boards were blazing after the company’s proxy was filed.
“Mel, God bless his heart, just finished throwing all current shareholders under the bus,” wrote one message board participant, who declared a target price of one cent for the stock.
RBR/TVBR observation: We previously noted that the problem with reverse splits is that they often send the stock price into a new freefall instead of stabilizing the price. “We don’t see Mel wanting to take that risk,” we said. Well, we were wrong.
RBR/TVBR note: Additional information see Can Sirius XM survive?