Today, we want to look further into Sirius XM Canada. We want to find out where it got all its money, and where that money went. For this, we need to look at the company’s cash flow statements.
A cash flow statement divides the cash flows of a company into three categories:
Operating activities are what the company does on a day to day basis. For Sirius XM Canada, this means distributing satellite radio across Canada and collecting money from subscribers.
Investing activities are when the company buys or sells assets, such as factories or equipment that it will use for many years.
Financing activities are when the company obtains money from investors or creditors (getting a loan from a bank, selling shares), or returns money to them (paying off a loan, paying dividends).
Here is a summary of the cash flows for Sirius XM Canada, using these categories. This is for the six years from 2011 to 2016, when it was a public company. As is standard for accounting information, the columns are presented in reverse chronological order:
In thousands of CDN $. The 2011 column is for only nine months, due to the merger earlier that year.
What this table tells us is that during the six years after it acquired a monopoly in Canada, Sirius XM Canada generated $301 million in cash by providing satellite radio to its subscribers. It invested $62 million of this money back into its business, mainly to purchase distribution rights for radio content and computer software. The rest of the cash, over $246 million, went into financing activities. That is, the company paid $286 million to its shareholders as dividends, offset by borrowing an additional $40 million. More on the borrowing later.
Cash Machine
Let’s be clear about what we are looking at here. This is a cash machine, generating consistently high free cash flows because of the company’s monopoly. The company keeps a small portion of this cash for reinvestment. The bulk of it, about 80%, is paid out to the company’s shareholders.
You might argue that this is simply the reward shareholders deserve for making such a large investment in broadcasting infrastructure and content. Unfortunately, the company’s own accounting disclosures wouldn’t back you up. Any investment the shareholders made in this company has been more than paid back.
Think about it. The total investment by shareholders in Sirius XM Canada to date is $186 million. We get this figure from the 2016 balance sheet: share capital plus contributed surplus. Dividends alone from 2011 to 2016 were $286 million. That is, the shareholders have received $100 million more in dividends than they ever invested in the company.
There’s more. In 2011, shortly after the merger took place, the company retired its preferred shares to the tune of $36 million. “Retired” means this money was paid to the preferred shareholders and the preferred shares were cancelled, leaving all the common shares unchanged.
We’re now at $322 million paid to the shareholders, just for owning shares.
Over and above this, two of the largest shareholders, Sirius XM US and CBC, were also paid money for providing Sirius XM Canada with radio content. Between 2011 and 2016, CBC received over $17 million and Sirius XM US almost $260 million.
And according to the notes to the 2016 financial statements, there is an outstanding demand by Sirius XM US for an additional $34 million. This is how much subscriber activation revenue the US company thinks it is owed by the Canadian company. As of the 2016 year end, this amount was still being sorted out by the companies’ lawyers.
All told, over $633 million going to the shareholders in dividends, share repurchases, and related-party transactions.
Forgive us our debts
Most of this money came from the revenue paid to the company by its customers. Not all, though. The company has increased its borrowing substantially on two occasions. In 2011, shortly after the merger, Sirius XM Canada raised over $130 million in new debt. It used most of that money to pay off all the old debts it inherited from the XM Radio side of the merger. There was $18 million left over, which it used to help retire the preferred shares.
In 2014, the company refinanced its debt again, issuing $200 million in new debt and paying off all the debts from 2011. This time, the company had $65 million left over. What did it do with this money? It gave it all (and more) to the shareholders, in the form of a special one-time dividend of $75 million.
This amount was included in the $286 million figure I gave earlier for total dividends. The $36 million payment to retire the preferred shares was not.
So, safe to say that the $186 million in capital paid into the company by the shareholders has long since been repaid.
Accounting Representations
Accounting does an interesting job of representing the results of all these payments:
The cash paid in is shown as share capital. It sits on the balance sheet permanently, signifying the contribution of the shareholders in perpetuity.
The cash paid out in related-party transactions reduces the profits of the company substantially, making the company look like it is struggling to earn a profit.
The dividend payments come out of these accumulated profits, and exceed the profits by so much that the company ends up with an accumulated deficit, instead of retained earnings.
All this makes it look as if the company has been losing money year after year, when it fact the deficit comes entirely from pumping dividends out the door.
Tax Time
So what have we learned so far about Sirius XM Canada? It enjoys a regulated monopoly in its industry but has an accumulated deficit. It generates so much cash that it has paid out to its shareholders far more than they ever invested. And it doesn’t pay any income tax.
I think we need to look a little more closely at this income tax issue. That’s coming up next.
Exterior and interior photos of Toronto's incredible art deco RC Harris Water Treatment Plant taken in 2012. It pumps water to the public, not dividends to shareholders.
The phrase "forgive us our debts," by the way, comes from the very Scottish version of the Lord's Prayer used by the Presbyterian Church in Canada. One never truly outgrows a Presbyterian upbringing.