Thursday, May 24, 2007

Goldman Sachs On Liquidity - Sirius

May 24, 2007
Tyler Savery

Mark Weinkes of Goldman Sachs published a note today note regarding liquidity:

More funding for Sirius? If so, why shouldn’t XM get a better deal?

Source of opportunity

We can envision several scenarios in which Sirius is actually fully funded, but think it is more likely the company returns to the capital markets as early as 2H2007. We believe this would be viewed negatively by investors and push the shares toward our $2.25 target, or another ~20% lower.

Whether operations, Loral, outside partners of XM Satellite help or hinder is an interesting question; Loral’s $100mn vendor financing seems available, but a $100mn compensating balance would tie up the same $100mn in 2007/2008; and XM, upon whose approval additional material financing is contingent, seemingly could get a better deal, or do nothing.

We believe significant expense management in 2007 and 2008 coupled with a return toward historical reported subscriber growth and churn will be key to reverse Sirius’ trend of increasing expenses and position the company to achieve a sustainable cashflow-positive business model.Having finished 2006 with $393mn in cash and pacing to burn $230mn in 2007, we believe Sirius may return to the capital markets in late 2007 orearly 2008 to fund 1H2008 operations as well some or all of the $200mn due on its newsatellite set to launch by 4Q2008.

We believe Sirius’ expense base will continue to rise with the rapidly growing revenue base. Sirius has not issued a target for 2007 EBITDA, as the company has historically, citing uncertainty of merger-related payments. While we respect the uncertainty, it is our understanding that the $4.6 million of merger-related costs incurred in 1Q2007 have been capitalized in “other long-term assets” on its balance sheet in accordance with SFAS No. 141, and as such would not appear to affect EBITDA. Additionally, even assuming $20-$30 million of incremental expense, it seems immaterial relative to an approximate ($530mn) EBITDA loss (pre-ESO) in 2006 and the targeted significant improvement in EBITDA in 2007.

We think it is possible, though challenging, for Sirius to get through 2008 without external financing—if fundamentals improve, but the timing of working capital and the committed payments leads us to believe Sirius’ business model is not likely to generate sufficient cash to cover the planned commitments. Siriushas a $300mn convertible bond offering due in 2009 that, absent a 60%-plus rally in the stock ($4.41 convert with stock), will likely need to be refinanced with additional debt. Further, Sirius has an estimated $200mn due on Sirius-5 by or in 1Q2009 and has stated plans to deploy two new satellites likely to be ready in 2010 and 2012 at an all-in cost of $300mn each. That said, it is possible that Sirius will execute sale-leaseback transactions once the satellites are in orbit and operational.

As a reminder, Sirius current liquidity includes a $100mn line of credit with Loral, and, in 3Q2005 Sirius executed a $500mn (9.625%, due 2013) debt offering and rolled forward its $500mn universal shelf registration. The covenants of the 9.625% notes permit both a subsequent $500mn in financing as well as specific vendor financing.

5/24/2007 01:45:00 PM

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