Arbitrage Spread Between Sirius and XM “Abnormally High” - Stifel
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Stifel analyst Kit Spring issued a note Tuesday in which he highlighted the arbitrage spread between Sirius (SIRI) and XM (XMSR) as being “abnormally high”. The arbitrage spread is represented by the delta between the price of Sirius and XM in relation to the 4.6 shares of Sirius that will be received for each share of XM upon a merger approval. With Sirius closing at $2.00 Tuesday, the implied price for XM is $9.20. XM closed at $7.57. Thus, if the merger were approved Tuesday, a share of XM would bring a premium of $1.63 over current prices. For this reason Spring has a BUY on XMSR.
The Stifel note also issued some highlights on the sector. Among the highlights are:
- lowering 2009 subscriber estimates by 3% and 2013 by 5%
- lowering OEM expectations despite deeper penetration
- Retail off, but not as bad as expected
- BUY on SIRI with a $3.50 Price Target (down from $4.00)
- BUY on XMSR with a $16 Price Target
SIRI - 2Q
- Gross OEM additions of 696k, down from 707k
- Net OEM additions of 234k, down from 401k
- Gross retail additions of 254k, up from 237k
- Net retail additions of 8k, up from (6k)
- Ending subscribers of 8.88MM, down from 9.04MM
- Revenue of $284.8MM down from $287.3MM
- EBITDA of ($43MM) and Adjusted EBITDA (EBITDA before non cash comp) of ($21MM) versus ($41MM) and($18MM) respectively
- Loss of $0.06 per share, unchanged.
XMSR - 2Q
- Gross OEM additions of 762k, down from 958k
- Net OEM additions of 266k, down from 477k
- Gross retail additions of 210k, down from 226k
- Net retail additions of (38k), down from (21k)
- Ending subscribers of 9.56MM, down from 9.79MM
- Revenue of $322MM versus $326MM
- EBITDA of ($45MM) and Adjusted EBITDA (EBITDA before non cash comp) of ($31MM) versus ($60MM) and($45MM) respectively
- Loss of $0.40 per share, up from a loss of $0.45
Spring has made some sensible adjustments to his model, and seems to be cautious in his approach, using conservative assumptions and data points. With a lack of any real guidance from the companies, and uncertainty in the merger concession outcome, a conservative and cautious approach is likely warranted.
Tyler Savery Position - Long Sirius, Long XM
This article has 88 comments:
of Value
News flash: Stations in Boston are rolling out "tagging" on HD radio. This lets listeners "tag" songs they hear on the free digital signal, which they can purchase for download later on I-tunes.
What does this say about satrad's competitive advantage?
of Value
Internet Radio - with a social networking component. Now on your desktop, but coming soon to a vehicle near you. Free.
of Value
of Value
The Devil’s advocate might counter that if the market has a bleak view of the merger being approved why did SIRI not fall as well? Answer: it is much harder to short a $2 stock. In many cases, it’s near impossible because it’s difficult to find firms that are willing to lend it when they break below $5.
Finally, even if the merger goes through and even if someone buys XMSR and gains the arb spread from the deal, the fact is that market risk remains very high and is likely to take both stocks down, wiping out any gains from this alleged arb spread. Market risk is key here. For an analyst to miss these points is highly irresponsible. But of course, analysts aren’t concerned with prudence since they cannot be sued. Those who have listened to analysts over the past several years have not fared well in either stock. And this is just another example of the danger in listening to these guys.
“Spring has made some sensible adjustments to his model, and seems to be cautious in his approach, using conservative assumptions and data points.” If he were being cautious he would not have a “Buy” on XMSR based upon on arb spread that indicates the merger is not particularly likely.
And some of you are too naïve to think that money can be so easily made. “Yea, the spread is huge and an analyst says it’s a great buy so I’ll buy it!”
Simply shocking.
The opinion on the arbitrage spreads was the analysts, not mine. My own opinion does remain that the merger will gain approval, but that is not material to the article here, as I was not writing about my own opinion on the odds of the merger happening.
Your assertions about shorting Sirius as a difficult task seem at odds with what is happening with the stock. Sirius has been on and off the REGSHO list many times in the past couple of months.
The quote about Spring's being more conservative and cautious stems from his taking down several estimates on metrics and adjusting his models to reflect a more conservative stance. I feel that this is prudent, especially with all of the uncertainties that are out there.
If someone gains 25% from the arb spread and sells on merger approval, then there is no way that they lose their profits. A 25% return is a decent return, especially considering you can accomplish it without a huge cash outlay. I am not recommending this trade, but it is something people will do.
SDARS is a speculative investment, plain and simple. I think that most will echo that sentiment.
The merger is long over due. The delay is hurting these companies because they cannot execute there business plans, stand alone or merged. The NAB has invested 2.3 million in lobbying activity from the first of the year, mostly to battle against the merger but not all. They have other agendas. Each company has invested about 200K to lobby for the merge in 2008. So far money talks at the FCC.
It is easy to take these companies down at this time but, there is a huge postential for growth in revenue in their existing business plan with excellent cost synergies as outlined after the merger, period. There are unlimitted possibilities for the merged entity with a variety of platforms for new revenue. It has all been discussed and some ideas not so much.
They are already in automobiles, OEM's like the product, consumers love the product, and interoperability will make the OEM platform better. They are already on the internet with Internet Radio. Recent patents filed by XM will make their portable players / software for internet radio compatable with a variety of partners on varying platforms going forward. This will be new revenue.
Consolidation of SAT RAD will make product development more consumer friendly opening up a whole new line of retail products available at new low rate subscription pricing. Once new customers get a taste the rest is revenue growth. The used car market hasn't even been tapped yet or forcast in anyone's numbers. Look at take rates of 50% with the other 50% becoming a second chance market with more atrractive margins given chipset investment was already accounted for. SAC for these folks goes way down.
HD radio is looking for an entry point. It's going to be OPEN ACCESS manufacturing or HD RADIO chipsets that HD is going to have to subsidize, NOT BOTH. Minority leased programming, again new revenue and who cares as long as it isn't more than 10% of Spectrum. It take more than a year and by then it will be irrelevent. Internet Radio competition without satellites or land lines everywhere, is not viable at least for the next 3-5 years. Again, these companies already have internet radio capability and the already have the Satellite Network to deliver it if they so choose.
So everyone who is waiting for the merger like it was Christmas, should put their money somewhere else. Please sell all your shares tomorrow so the price of the stocks can go down a bit for me to buy some more. Thank you.
As for my statements regarding the difficulty in shorting a $2 stock, this comes from my experience as a trader on Wall Street. I never said it could not be shorted. I said it is much more difficult to find shares. I know this from personal experience.
As far as the analyst, I could care less about the adjustments to his models. The simple fact is that he has a buy on XMSR based on this arb spread. That is the key point.
"If someone gains 25% from the arb spread and sells on merger approval, then there is no way that they lose their profits. A 25% return is a decent return, especially considering you can accomplish it without a huge cash outlay." ----- Let me spell it all out so that you understand. If you buy XMSR hoping to gain 25% from the spread, how can you be sure that both won't go down prior to a merger approval due to a continued sell off in the market? As well, remember that you have to hold the stock until the deal closes, which is usually long after approval.
Tyler, I think you really should reconsider whether you should continue posting on Seeking Alpha or anywhere else for that matter. You certainly have no idea what you are talking about and you have never managed money profesionally. Maybe you should focus more on reading rather than writing. It seems to me that you're only purpose here is to highlight any positive news you can find without critically assessing all of the facts and presenting an unbiased view. You may be popular to these SIRI/XM speculators, but based upon reading many posts from this and your previous articles, I would not consider them wise investors to say the least. But this is the company you keep. I suppose they are your peers. Good luck.
As for your rebuke of Tyler, I feel it is unfair and poorly contrived. Tyler has never claimed to manage anyone else's money or to be a financial adviser. He has been a dedicated investigator and reporter of the SAT RAD sector at a time when information about the companies, the merger, the competition to the merger, the minority interests, the OEM performance for the stand alone companies has been otherwise absent. I also believe he has brought out insights to the process that would have otherwise been ignored. So if you are upset with analysts, I can understand. But to shoot the messenger is naive and shows poor understanding of Tyler's role.
WAKE UP people, we must vote all the elected officals out. We must do it in every election until they represent us, the people who voted them in. If they see and know they will not get re-elected unless the represent we the people they will do what is right or we get someone who will. WAKE UP, quit being stupid sheep and cattle. VOTE< VOTE THEM ALL OUT.
Part of the arb play, and a popular trade is to go long XM and short SIRI:
1. Assume you short $1,000 worth of SIRI (500 shares, SIRI @ $2.00).
2. You take the $1,000 from the short sale and buy long on XM (129 shares) (XM @ $7.79).
3. Upon merger closure, your 129 shares will become 594 shares of XM.
4. You owe 500 shares of SIRI on your short, which you can pay off. This leaves you with 94 shares relatively free and clear..
5. If as you say the stocks both go down, you will still have locked in 94 shares on the arb play. Your investment capital into XM came from your short sale on SIRI. Regardless of moves in the stocks, you walk away with shares with virtually no capital outlay.
This example is oversimplified but details an arb play that is often used in stock transaction mergers. I am not recommending it, but clearly people are well aware of this type of trade.
Much of what I present isthe view of sector analysts without my opinion interjected. If I do interject my opinion is is quite clear.
I have no "need" to be positive for the money. I have stated many times that I sold most of my SDARS stock prior to writing about the sector. Do I still hold stock? Yes. Will it change my lifestyle if it goes up or down? No. I am much more invested in other areas. Do I want the merger to go through? Yes.
If you think I only present the positive then you have not been following what I have been writing. I covered the slumping OEM channel, the Goldman downgrades, and other reports that have been sour on satellite. I have written that I feel that people expecting a short squeeze may well be disappointed.
An investment in SDARS has risk. People who typically invest in it understand this.
Lastly, most analysts, as well as sector followers in in the camp that the merger will indeed pass. There were some who felt that the merger would never pass DOJ muster. They were quite wrong. Now, even most of those naysayers have a belief that ultimately the merger will pass. If you want to say that I am "missing" by feeling that the merger will pass, that is fine. Time will bear out whether or not I missed.
Thanks guys, looking forward to an answer.
The example of the “arb play” that you list is NOT often used. How you can make such generalizations confirms you think you know more than you do. There is no typical arb play. Each one depends on the given conditions and probabilities of the various events. Anyone who says there is a typical arb play isn’t an arb trader. Between the two of us, I’d say I know much more about arbitrage than you. Where did you get your knowledge of arb strategies?? From online posts?
Once again, it’s very difficult for individual investors to find firms that will let you short $2 stocks. I would doubt you can get them from online brokers like E-Trade and Schwab. And if you can they sure won’t have much to hand out. Usually only the Wall Street brokers have them but you’ll find it very difficult to do even an unsolicited trade due to compliance. These are facts. Accept them.
So based on your extremely risky arb example, I guess you realize you are providing justification for shorting SIRI. I wonder how all of your SIRI cheerleaders will like that.
You assume that a short SIRI position will hedge a drop of both stocks. I will guarantee you that it will not. Both stocks will not drop the same amount. I will guarantee you that the strategy you list will end up losing money if both stocks go down. That is like thinking you will be completely protected from all downside if you buy puts. These strategies only provide partial protection. As a matter of fact, XM could drop and SIRI could rise to narrow the spread. Get your head on straight.
The arb example you list is extremely risky because you are doubling down in terms of the amount of leverage you are using. How you can even use this example and apply it to SIRI/XM for the people that read these posts is highly irresponsible.
Even a simple short is very risky. Unless you are a professional trader you should not be shorting..ever. It is obvious to me you have no real experience in arbitrage.
Don’t try to turn this around and make this an issue of whether the merger will pass. That is not the issue. I find your reliance on the merger as some sort of savior to be a bit funny. Even if the merger passes, these companies are going nowhere.
And I have read your previous posts. They are overwhelmingly biased and do not paint the full picture. You rarely make any discussion of risk and when you do, all you say is there is risk. Tyler, stick to your day job (whatever that might be) and I’ll sick to mine on Wall Street. I don’t write articles about surgery or engineering because I have not been trained for these careers. If I were to start writing about how I would perform brain surgery I’d be seen as a quack. Likewise, anyone who writes about investments without having been formally trained and having professional experience is a quack.
That news as taken so long, as you can see some people now think that, normal sure signs of a merger approval is wishful thinking. In any real world the DOJ approval with, zero, zipp, notta, conditions would be enough to make most believe the merger is a sure thing. As you can see, though there are still some that still think that even with the Head of the FCC putting his weight behind it, along with the DOJ, it is still not enough to get them to believe it will happen. I dont know what it is that makes them think this way. Maybe they think the NAB is that strong, I feel if it were, they would have been able to sway Martin. Believe me these people talk to each other and at the very least the other two commissioners are aware of the NAB bull.
As for the moderator, I have been able to make a nice enough profit to retire off of a industry that many like him believed had no up side. So please forgive me if I flush his crap down the water closet where it belongs. Wishful thinking indeed, and I am suppose to listen to him as a proffessional.
www.orbitcast.com/arch...
www.orbitcast.com/arch...
P.S. Tyler I told you, dont bother with those types of people that you have to keep telling over and over and over again, the samething. People that have read your articles for some time know that you are an excellent place to pick up information that would take many more time then it is worth. I can see why you do it now, because like I have said this sector has become somewhat of a hoppy for me to.
here's a link
www.iphoneatlas.com/20.../
Want to enjoy the best of SIRIUS without having to buy a radio? If you've got a computer with Internet access, you can start listening to The Best Radio on Radio right away.
• 64 Channels of 100% Commercial-Free Music
• Over 20 Channels of News, Comedy, Sports & Talk Radio
• Includes Howard Stern, SIRIUS NFL Radio, Martha Stewart and more**
• CD-Quality Sound (128K)
• No Radio Required
Notice the "• No Radio Required ". That's how they do it on iPhone.
With my subscription, I received an online Username and Password. So, This HUGE NEWS is known to subscribers. :) The springboard for SIRI to be used by iPhone is there.... but .... why would Apple let you connect to their competitor? (iTunes)
SERVE 0310
of Value
I am not being argumentative, but there is something there are a few things that need to be pointed out:
You stated, "The example of the “arb play” that you list is NOT often used. How you can make such generalizations confirms you think you know more than you do. There is no typical arb play. Each one depends on the given conditions and probabilities of the various events. Anyone who says there is a typical arb play isn’t an arb trader. Between the two of us, I’d say I know much more about arbitrage than you. Where did you get your knowledge of arb strategies?? From online posts?"
In response, this "arb play" is directly similar to that used by holders of converts. They short the stock against the converts thereby locking in a virtually guaranteed return. This is exactly what Honda did with XM stock.
You stated, "Once again, it’s very difficult for individual investors to find firms that will let you short $2 stocks. I would doubt you can get them from online brokers like E-Trade and Schwab. And if you can they sure won’t have much to hand out. Usually only the Wall Street brokers have them but you’ll find it very difficult to do even an unsolicited trade due to compliance. These are facts. Accept them."
In response, there is a documented large short position in SIRI. The REGSHO listing bears this out. Whether an individual trader is able to short is not really material. Shares are being shorted. Who is shorting them does not really matter.
You stated, "So based on your extremely risky arb example, I guess you realize you are providing justification for shorting SIRI. I wonder how all of your SIRI cheerleaders will like that."
In response, I do not have "SIRI cheerleaders", nor do I really care what they say about such a trade, nor of my own opinion. I have had many criticize my belief that the short term situation in SDARS is very challenging even with a merger approval.
You stated, "You assume that a short SIRI position will hedge a drop of both stocks. I will guarantee you that it will not. Both stocks will not drop the same amount. I will guarantee you that the strategy you list will end up losing money if both stocks go down."
In response lets run through each situation with taking that trade with SIRI at $2.00 and XM at $7.79. The arb in this situation is about 19%:
SIRI DOWN and XM DOWN
- Starting position is $0
- short 500 SIRI @ $2.00. You now have $1,000
- Buy 129 of XM @7.79. You now have $0
- SIRI drops to $1.50 and XM drops to $7.00
- deal closes. You now have 594 shares of SIRI (XM shares converted)
- Buy 500 shares of SIRI to close short position @ $1.50. You are now down $750
- Sell 594 shares of SIRI at $1.50. You gain $891. Profit is $141 or 19%
SIRI UP XM DOWN
- If SIRI went to $2.50 and XM went down to $7 you would cover the short for $1,250, and sell the shares for $1,485. Again, a 19% gain
SIRI DOWN XM UP
- If SIRI went to $1.50 and XM went to $9, you would cover your short for $750 and your sale would net $891. Again, a 19% gain.
SIRI UP XM UP
- If SIRI went to $2.50 and XM to $9.00, you would cover your short for $1,250 and sell shares for $1,485. Again a 19% gain.
That is like thinking you will be completely protected from all downside if you buy puts. These strategies only provide partial protection. As a matter of fact, XM could drop and SIRI could rise to narrow the spread. Get your head on straight.
Could you please outline your statement that you will lose money if both go down? The risk in such a trade is not the price, but whether or not the merger gets approval, as well as the time involved for the play to happen.
You stated, "The arb example you list is extremely risky because you are doubling down in terms of the amount of leverage you are using. How you can even use this example and apply it to SIRI/XM for the people that read these posts is highly irresponsible."
In response, I simply gave an example. I did not recommend the strategy, nor have I employed it myself. Such a strategy minimizes the use of your own capital, virtually locks in the spread, but relies on the companies being in business, and the merger gaining approval in a timely manner.
You stated, "Even a simple short is very risky. Unless you are a professional trader you should not be shorting..ever. It is obvious to me you have no real experience in arbitrage."
Shorting is risky. I rarely short an equity. It simply is not my style. Any investment is risky. As to experience in arbitrage, I outlined one type of trade, and gave the commonly used example of a strategy with converts. I will leave that part of the conversation alone due to what was outlined above.
You stated, "Don’t try to turn this around and make this an issue of whether the merger will pass. That is not the issue. I find your reliance on the merger as some sort of savior to be a bit funny. Even if the merger passes, these companies are going nowhere."
In response, These stocks are all about the merger right now. You were the one that stated that the arb players were betting that the merger would not pass. I disagree with your assertions, and stated that time will bear it out. Right now we simply have opinions. You feel that the companies are going nowhere. That could well be the case, but again, it is an opinion. The reasoning's behind opinions would make a good discussion.
If you want productive discussions, that is wonderful. People should see as many perspectives as possible. That is a healthy and valuable discussion. Name calling accomplishes very little, and diminishes from the value of a conversation.
Thanks for your opinion and the discussion
Point taken. My posting and responding in the comments section here seems to take away from a healthy discussion of opinion, as it appears some people simply want to discuss subject matter that veers outside what the topic of discussion should be.
Thanks All
Anyone who speaks about thmselves in the third person is wierd. Sorta like tha single 50 year old uncle who lives in your grandmothers basement, and plays Dundeons & Dragons. A given birth name and and a face is what we get with Tyler. What are your credentials. Is your real name Dungeon Master Doug? C'mon, your soapbox is as high as you are.
Bababoooooie.... Nice link. I think that's what XM's product is going to do under the Skycube and Skybud names. Their portable products have been under development for a longer time than Sirius'. Their release after the merger should bring a lot of buzz to table and hopefully revenue to follow.
of Value
If you want to treat the stock market like a casino or your favorite sports team and "cheer" for your pet stock, be my guest. You won't be cheering when your money goes into a hedge fund manater's pocket because he shorted it when you went long.
cos1000, I know, I was just having a little fun with that comment, about Ibiquity. You should know me by now, I could not resist.
of Value
LOL....After iI state that I will stop posting here in the comments section you go and ask a question. Are you tryiong to kill me? Just kidding.
Tonight is at 9:00 PM
That's it, no more comments posts for me.....LOL
SERVE 0310
You get the point! Sirius is becoming more like the three headed dog guarding hell. SATRAD, iRAD, and on demand download on the way. The stock may not be headed anywhere soon, but the infrastructure is in place for a Audio media fan to enjoy!
The merger aint over till it's over!
But.......
if it walks like a duck, and quacks like a duck,
you can be sure......
SERVE 0310
SERVE 0310
SERVE 0310
et cetera
“I don’t understand when people are going around worrying about, we need to have English only. They want to pass a law, we just, we want English only,” Obama told supporters in Powder Springs, Georgia on Tuesday. “Now, I agree that immigrants should learn English, I agree with this. But understand this, instead of worrying about whether immigrants can learn English, they’ll learn English, you need to make sure your child can speak Spanish.” “You should be thinking about how can your child become bilingual,” he said... “We should have every child speaking more than one language. It’s embarrassing when Europeans come over here, they all speak English, they speak French, they speak German. And then we go over to Europe and all we can say is merci beacoup, right?”
It's hard to read that as anything other than a critique of our useless public education system and of the use of idotic wedge issues like English-only to divert attention from real issues, like say, our useless public education system. I wouldn't vote for him (nor would I vote for the hypocritical bag of skin cancer that serves as his opposition), but he's not dumb, and here, in my opinion, he's not wrong either.