Investors need to be watchful this week as Sirius XM Holdings (NASDAQ:$SIRI) will be releasing its Q2 results on Thursday, July 27. Needless to say, these results will be a tad bit more complex due to three events that took place during the quarter. These events include the following:
- The purchase of Automatic Labs Inc (Automatic) on April 27
- An investment in Pandora Media (NYSE:$P) on June 9
- Two new bond issues which totaled to $2 billion on June 26
That said, there shouldn’t be too much impact from these transactions as the latter two took place late in the quarter. Additionally, the purchase of Automatic was pretty small. However, the following is what investors might see on the report.
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Automatic Labs Acquisition
The Automatic acquisition was discussed on the quarter one conference call, and Sirius CFO David Frear stated:
“…nothing about the acquisition of Automatic would cause us to change our guidance for the year for EBITDA or revenue. What we spent out will be in the 10-Q, it’s a little over $100 million to acquire it. And look, as we get in there and in future calls, I think you can expect to hear us talk more about it. But as it relates to revenue and EBITDA, it wouldn’t cause us to change those measures at this point.”
For the purchase of Automatic Labs, the 10-Q showed that Sirius spent $115 million. While the $115 million will not directly impact EBITDA, there is a good chance that there will be some impact on both expenses and revenue. And because Frear has stated that both revenue and EBITDA guidance won’t change, we know the added revenues are small, and the increase in operating expenses should not be vastly different from the revenue.
Interestingly enough, a large number of employees who came with the Automatic purchase have either left and are being replaced, or Sirius is going on a hiring hunt. Don’t believe me? Just look at the 17 Automatic job openings on the Sirius website.
The Pandora Media Investment
Mentioned briefly, Sirius took an equity stake in Pandora in early June. The entire investment is thought to be $480 million, with an initial purchase of $172.5 million having already taken place. Following all regulatory approvals, the balance of the purchase will take place at a second closing. The second closing and approvals are “expected to close by the fourth quarter.” If both are not completed by February 1, 2018, either party may terminate the agreement.
Additionally, there are a number of standstill agreements stopping Sirius from accumulating more shares for 18 months. After the 18 months are over, Sirius may not surpass 31.5% ownership of Pandora equity securities so long as Sirius has representation on the Pandora board of directors.
Pandora will have to redeem all of the preferred stock on the fifth anniversary of the agreement “…for an amount equal to its liquidation preference plus all accrued and unpaid dividends.” Also, Pandora will have the option to redeem all the shares at any given moment after the third anniversary. This, of course, is according to a formula based on the closing prices over a 30-day period, if such closing prices averaged more than $18.38.
It’s worth noting that the 6% preferred stock dividend will have no impact on Sirius revenue and should be labeled and recorded as Other Income. There will be a minimal impact on earnings, as the first $172.5 million would only yield $10.35 million for an entire year.
The Two New Bond Issues Totalling $2 Billion
As mentioned, Sirius issued a total of $2 billion of new long-term debt towards the end of last month, comprised of $0.75 billion of 3.875% Senior Notes due 2022 and $1.25 billion of 5.0% Senior Notes due 2027.
At the end of the first quarter, Sirius had $0.5 billion of the 4.25% Notes and $0.6 billion of the 5.75% Notes. For these notes, the annual cash interest expense was $55.75. On the new debt, the cash interest expense will total $90.625 million.
While there will be a small increase in interest expense and fees on the new debt, there will be a more significant change in the third quarter. Additionally, the third quarter will record the write-down of the remaining unamortized interest cost of $5.8 million. With the additional debt, the annual interest costs should go above $350 million.
The Takeaway:
Many forecasted that the debt would increase to fund the current $2 billion per year share buyback program. However, because the $115 million purchase of Automatic and the $480 million investment in Pandora is expected by the end of 2017, this could indicate that Sirius will be tapping the debt markets by the end of this year.
Featured Image: twitter
