What kind of signals are investors sending about the potential buyout of Sirius XM Canada Holdings Inc.? Well, for one, that the bid price of $4.25 a share reported by The Globe and Mail is too low. The shares closed Friday at $4.41, and they traded as high as $4.49 this week, meaning the market thinks a higher price is needed to close the transaction.
That trading action, however, also suggests that investors think $4.25 isn't too far from the final number. If the bid grossly undervalued Sirius XM Canada, one suspects, the shares would be trading well above that number in anticipation of a knockout offer.
Perhaps, say, closer to the $6.50 target price that analyst Vince Valentini of TD Securities has placed on the shares. And one major shareholder, Montreal's Van Berkom and Associates Inc., thinks the proper value may even be higher.
Mr. Valentini is easily the most bullish of six analysts on the stock; the average of their target prices, according to Bloomberg, is $4.96, and Mr. Valentini is the only analyst to exceed $5. Since his target is 53 per cent above the offer, he has produced one of the blunter research notes on the matter. While other analysts politely call the reported $4.25 price "opportunistic," Mr. Valentini flatly calls it "too low," and says he believes minority shareholders "would be very unreceptive to a takeover offer" at that price.
First, some background. Sirius XM Canada is affiliated with the U.S. satellite-broadcasting giant Sirius XM Holdings Inc. Owing to Canadian media-ownership rules, the U.S. company owns a significant chunk of the Canadian company (36.9 per cent) but does not technically control it. Sirius XM Canada has three large minority shareholders – John Bitove, Slaight Communications Inc. and Canadian Broadcasting Corp. – each owning 10 per cent to a little over 12 per cent of the company. One or more are believed to be part of the group seeking to take Sirius XM Canada private. The company, for its part, says it "has been approached on a preliminary basis regarding a potential corporate transaction" and "has not received a binding proposal."
So, what's the prize? A company that has had softer revenue and subscriber growth numbers than its counterpart south of the border, and that may face higher royalty payments to the U.S.-based Sirius XM in coming years. The situation explains why some analysts are cool to the stock's potential for gains in the short term.
What the stock's advocates say, however, is that Sirius XM Canada's position doesn't justify the huge disparity in the valuations of the two companies. Sirius XM Holdings has an enterprise value – market capitalization plus net debt – of nearly $24-billion (U.S.) and has about 24 million paying subscribers. That means investors in the U.S. company are placing a value of roughly $1,000 on each subscriber. Sirius XM Canada, by contrast, has an enterprise value of just over $700-million (Canadian) and just under two million subscribers, giving the Canadian customers a value of about $350 apiece, or roughly one-quarter as much, when the currency translations are made.
Mr. Valentini's target price is based on his estimate of future cash flow, which he says he has already reduced to reflect softer subscriber and revenue-per-customer trends, higher capital expenditures, and the possible increased royalties. "If the company can improve subscriber growth and/or negotiate better-than-expected terms with [Sirius XM Holdings], then we believe there could be upside to our target price in the future." To lower his $6.50 target, he says, he could make dramatic changes in his revenue or royalty estimates, but that "would be entirely inconsistent with the current trends being experienced by [Sirius XM Holdings] in the U.S."
Forecasts are just that, of course, but there's another piece to this puzzle: Mr. Valentini says the annual dividend of 42 cents – which he believes is fully supported by the company's balance sheet and cash flow – implies that shareholders would be giving up a 9.9-per-cent yield if they sell at $4.25. That is, shall we say, atypical of takeout valuations.
Van Berkom and Associates has owned Sirius XM Canada for several years and now holds close to four million shares, which is about 3 per cent of the company and about 10 per cent of the shares held by minority shareholders, says Gabriel Bouchard-Phillips, a partner and senior analyst at the firm. It is disappointed that an offer may take place at a price significantly lower than the $5 range where the stock was in December, just a few weeks ago.
Mr. Bouchard-Phillips says their cash-flow analysis suggests a value "north of $6.50" as a stand-alone company, and as a holder of Canada's only satellite-radio licence, Sirius XM Canada has "strategic value." A going-private transaction could create $20-million to $40-million in cost synergies, he says.
"If you look at the premium Lowe's offered for Rona, they offered a 100-per-cent premium for a strategic asset. Here it's a 10-per-cent premium off a three- to four-year low," he says. "It's ludicrous."
"We truly believe the music satellite service in Canada is a valuable service that people are willing to pay for," says Benoît Durand, a Van Berkom portfolio manager. "Despite there being other competitive offerings … Sirius XM Canada is a quality service company with a growing subscriber base, and as such it deserves a reasonable valuation – which is certainly not what's currently reflected in the stock price."
If the buyout group is unwilling to raise its offer of $4.25, both Van Berkom and Mr. Valentini suggest a better course for shareholders: Sirius XM Canada could aggressively buy back its shares on the open market. (The company has announced a stock-buyback program, but has not yet begun the purchases, according to its disclosures.) This is preferable to borrowing money to take the entire company private, Mr. Valentini says, because a buyback program means "shareholders get to choose if they want to sell or not. … In other words, use the company's excess debt capacity to benefit all shareholders, and not just those involved in a privatization consortium."
We will soon see whether Sirius XM Canada tunes out those who think there is far more value in its shares