SiriusXM borrows $600m

SiriusXM is borrowing $600 million which it will largely use to pay down existing debt.  The bonds will only be available outside the US. The bonds will offer interest of 5.70 per cent, and used to pay down debt due in 2015 with an interest rate of 8.75 per cent.

There is no suggestion – at least no recent suggestion – that SiriusXM, controlled by Liberty’s John Malone, is looking to extend its offering outside North America.

Indeed, North America pay-radio, despite the challenges from wireless music services such as Pandora and Apple, is doing rather well. A recent report from investment bankers Goldman Sachs gave the SiriusXM radio service a price target of $4.25 per share for the end of this year.  Some observers are even more bullish. Recent trading has been around the $3.75 mark.  Goldman Sachs is not alone. Other industry-watchers also consider pay-radio to be on something of a roll with increased free cash flow to be expected going forward.

Three weeks ago (July 9th) SiriusXM announced that it had added “715,000 net new subs during its Q2, and taking the gross total to an extremely appealing 25m subscribers. It said : “Strong automotive sales helped drive 15 per cent growth in net additions over the second quarter of 2012 and set a post-merger record for quarterly net subscriber additions. The Company also announced that it was raising full-year guidance for total net subscriber additions to 1.5m from its previous guidance of 1.4 million.”

The actual numbers (unveiled on July 25th) saw just about every metric beaten, including its own guidance for the period. “An extraordinary Q2” said CEO Jim Meyer. Guidance as to expectations for this year has again been raised with SiriusXM now saying it expects to wrap the year with an EBITDA margin of 30 per cent (last year 19 per cent).

“The new subscriber additions in the quarter have helped SiriusXM reach an exciting new milestone that reflects the popularity and reach of SiriusXM programming and services,” said Jim Meyer, CEO, SiriusXM. “The quarterly results bolster SiriusXM’s leadership position in a dynamic audio entertainment marketplace as we continue our trend of strong, profitable growth. Additionally, we are raising 2013 subscriber guidance to 1.5 million net additions based on our record performance in the quarter.”

This, by the way, is the best-ever quarter since the merger between the two rivals. No wonder the bankers and analysts up-rated the stock. Since falling under the charms of Liberty Media’s John Malone, the company has been buying back $2-billion worth of stock. Moreover, some observers think that the broadcaster’s forecasts are deliberately modest. For example, one factor is the current agreement in place with auto-giant General Motors. Today, a GM vehicle is sold with a Sirius-XM radio installed and this immediately counts as a net-new sub. However, Q4 this year will see a new agreement kick in where the new sub only gets counted at the end of a 3-month period, and thus becomes a ‘real’ paying customer. This, it is prudently thought, might skew Q4’s numbers.

But also adding to the positive news is that on July 17th SiriusXM announced it had tied up with Nissan, via AT&T, which will use the built-in telematics functionality within the broadcaster’s in-dash receivers. Nissan drivers will be able to tap into a suite of security and safety applications (accidents, stolen vehicle tracking, roadside assistance, etc).  We see this as a key ‘next step’ for adding value (and ARPU) to SiriusXM’s offerings.

malone

“Our plan is to provide services to connected vehicles are getting increasingly sophisticated and we are very excited about the company’s future in this area”
Jim Meyer, CEO, July 25

But it is also fair to ask: what might Malone do next? Malone is never one to stand still for long, and Internet gossip – and it is just chit-chat – suggests he might be selling SiriusXM in order to raise funds to move more aggressively into US cable. Today’s value of SiriusXM is said to be about $23 billion, not bad for a business that was effectively bankrupt just 3 years ago. And Malone ‘owns’ just over half of that valuation.

There are now 54 million vehicles on the road in North America with either a Sirius or XM radio set in the dashboard

However, if there is a likely market upside of around $1 – or more – a share then it would be a fool who would sell just now, and Malone is no idiot. Besides, the USA is in recovery mode where car and light vehicle sales are getting back to pre-recession levels.  SiriusXM should benefit very nicely from not only strong auto sales in June, but for the upcoming quarters, given that the US model year tends to run from the autumn. As one Sirius-watcher said a few weeks ago: “It would appear that the auto sector is in full blown recovery, and that doubters are vanishing like yesterday’s newspaper. For the first six months of 2013 auto sales stand at an impressive 7.8m, well on pace for the 15.5 million that many analysts are now forecasting.”

New car registrations are always good for Sirius-XM, and as these newer models trickle down into the second-hand (pre-owned) market then a good proportion of those buyers hold onto their pay-radio subscriptions. There are now an estimated 50 million cars, SUVs and trucks with Sirius or XM kit installed. Indeed, SiriusXM now had 10,000 auto-dealers participating in its ‘pre-owned vehicle programme’. These dealers can give a free 2 month trial to SiriusXM to any car buyer as a temptation to stick with the service.

Nevertheless there are doomsayers. Most of the anxiety comes from the cellular industry which suggests that tomorrow’s ‘connected car’ will have enough 3G and 4G/LTE bandwidth to supply services like Pandora and Apple direct into a vehicle via wireless. Perhaps. But it is also possible that SiriusXM will itself get into the ‘telematics’ business. SiriusXM CEO Jim Meyer made several comments during a recent analysts call.  “We hold the strong belief that having satellite connectivity and IP connectivity in vehicles will prove to be a durable advantage versus IP only connectivity as we move into a connected car world. We are already working closely with several OEMs on the development of in-car apps that will provide the initial integration of SiriusXM streaming services. So stay tuned for announcements in this area as well.”

However, one constant grumble is that SiriusXM’s churn numbers are terrible, and that’s been true for some time. In the past a monthly churn of 2 per cent – and worse – has not been unusual. Q2 was – for SiriusXM – an outstanding 1.7 per cent, while monthly ARPU grew a tad from $12.05 to $12.28.

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