SIRIUS Dilution & Low Convertible Debt Price Weigh On Shares (SIRI, XMSR)

SIRIUS Satellite Radio, Inc. (NASDAQ: SIRI) has finally completed its merger with XM Satellite Radio (XMSR).  In fact, SIRIUS is the only surviving stock now as XM doesn’t trade any longer after last night.  SIRIUS has made a securities sale that is comprised of stock and debt, and the equity portion appears to be adding some worries over dilution on top of what may be a low conversion price of debt.  last night, Jim Cramer panned the common stock being as safe as a lotto ticket and said he’d look at buying debt if you can.

The XM debt offering came to a total of $550 million of 7% principalnotes with a 2014 maturity and are exchangeable at at a rate of 533.333shares of SIRIUS per $1,000.00 face. That leaves a $1.875 conversionprice at simple math levels before any discounting.

SIRIUS is selling up to 262,399,983 shares, and 183,679,988 shares arebeing offered at a fixed price of $1.50 per share and the remaining78,719,995 shares are expected to be offered from time to time afterthe fixed price offering at prevailing market or negotiated prices.Shares are being sold to affiliates of Morgan Stanley and UBS.

The company now has over 18.5 million combined subscribers and its forecasts are the following:

• reiterated prior guidance for the combined SIRIUS XM Radio;
• expects to realize total synergies (net of costs) of approximately $400 million in 2009;
• expects adjusted EBITDA exceeding $300 million in 2009;
• expects to achieve positive free cash flow, before satellite capital expenditures, for the full year 2009;
• expects that both synergies and adjusted EBITDA will continue growing beyond 2009.

Whether or not it can live up to these goals depends upon managementand upon Joe Public in a weak economic and auto environment.Unfortunately you can see with this drop of 16% to $1.57 that investorsaren’t exactly excited about the extra common stock dilution nor aboutthe low implied convertible share price.

JON C. OGG
JULY 29, 2008