Sirius XM: Call It a Difference of Opinion
NEW YORK (
) -- While
Moody's and others smile on Sirius XM's recent debt sale
, Morningstar remains concerned about Sirius's financial condition.
"We think there is a 25% chance that the shares have no value, with the present value of its future cash flows being worth less than its debt outstanding," Morningstar analyst Michael Corty writes in a note to investors. "In our bear case scenario, competition from other audio services keeps subscribers at the same level during the next ten years, resulting in flat average annual sales growth and average EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) margins of 15%."
Morningstar's bull-case scenario assumes average yearly revenue growth of 6.8% through 2019, with total subscribers reaching 31 million after a decade and EBITDA margins averaging 26%. "Given the uncertainty of projecting the firm's future cash flows and heavy debt load, we assign an extreme uncertainty rating to the shares," Corty writes.
One of the Morningstar analyst's biggest concerns for Sirius XM is the company's dependence on automakers for new subscribers, amid the possibility that they could scale back on installations if they become uneconomical. Despite the prevalent belief that terrestrial radio could never beat Sirius XM when it comes to premium, commercial-free radio content, Corty still looks at terrestrial radio as a free and available substitute.
"New technologies that help put wireless access everywhere would create additional competition for satellite radio," Corty adds.
On March 12, Sirius XM announced its intention to offer $550 million of senior notes due 2015, and on March 17 the company announced that it closed the sale of $800 million of its 8.75% senior notes due 2015. Moody's likes it and so did Brett Harriss of Gabelli & Company.
"I think they got a favorable rate for it," Harriss says. "I think they're levered, but I think they'll be able to handle their maturities. Post-merger, they do generate enough cash."
Moody's believes that Sirius XM's recent debt sale not only boosts Sirius' liquidity profile, but also helps remove the obstacle to a fully combined Sirius XM. This refinancing would push out a good portion of debt maturing in 2013 by two years.
Sirius XM stock has edged down 0.4% to 87 cents midday Friday.
-- Reported by Andrea Tse in New York
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