Posted by: Olga Kharif on October 17, 2008
Yesterday, Sirius XM took a preventative step that could help the company avoid getting delisted from the Nasdaq in the future. In a preliminary proxy statement issued on Oct. 16, Sirius proposed that shareholders approve a reverse stock split at its December annual meeting.
If the approval is granted, the company’s board could use the reverse split to prop up the company’s share price, which has slumped to below 40 cents. As you’ll recall, the Nasdaq requires companies to keep their share prices above $1. After 30 days of non-compliance, violators receive delisting letters. The violators than have six months to shape up. Fortunately for Sirius, yesterday, the Nasdaq, many of whose components have fallen to below $1 a share, decided to suspend its delisting rules until January.
If Sirius’s shares aren’t above $1 by then, though, it could still receive a delisting letter in February. That’s where the reverse split comes in. If approved, it would authorize Sirius to pair down shares by 10 to 50 times. The proxy would also authorize the company’s board to issue additional stock.
I am a little worried about the “50” number. Sure, Sirius needs to have a wide safety margin. But let’s do some back-of-the-envelope math: A 50-times reverse split would only be necessary if Sirius’s shares fall to 2 cents a share, unless the company issues more stock, which is a real possibility. In that proxy, Sirius is also requesting authority to nearly double the number of its shares outstanding — a move that would significantly dilute holdings of existing owners.
That said, I believe that both measures are right and necessary, given the current market environment. They will give Sirius’s management more flexibility depending on which way the market turns and as the company seeks to secure additional funding.