Concerned Shareholders of Sirius XM Canada and Sirius XM Holdings

August 08, 2016 08:00 ET

Shareholders Object to Valuation and Fairness Opinion in Sirius XM Canada Holdings Inc.'s Management Information Circular and Maintain That Proposed Privatization Does Not Reflect Fair Value

TORONTO, ONTARIO--(Marketwired - Aug. 8, 2016) - Shareholders holding approximately 8.4 million Class B shares of Sirius XM Canada Holdings Inc. ("Sirius XM Canada"), representing 21% of those held by minority shareholders excluding the CBC (the "Shareholder Group"), have reviewed the management information circular ("MIC") filed on August 2, 2016 in connection with a transaction to privatize Sirius XM Canada ("Proposed Transaction"), and have found numerous flaws and omissions to Ernst & Young's valuation ("EY Valuation") and the National Bank fairness opinion ("NB Fairness Opinion"). In addition, the Shareholder Group has found what it believes to be evidence of the coercive tactics used by Sirius XM Holdings Inc. ("Sirius XM Holdings") as outlined in its complaint to the OSC filed on July 14, 2016.


  1. Inappropriate Taxation of Projected Earnings

Sirius XM Canada currently saves $20 million per year in cash taxes and is expected to continue to do so every year for at least 5 more years due to the application of tax loss carry forwards. Both the EY Valuation and NB Fairness Opinion ignore over $100 million of free cash flow from such tax savings, and the EY Valuation only attributes $22 million to the value of tax loss carry forwards, reflecting only a year's worth of cash tax savings.

  1. Absence of Comparable Company Analysis

The EY Valuation fails to use precedent transactions and trading multiples of comparable companies, particularly the value of Sirius XM Holdings itself which is trading at a significant premium to Sirius XM Canada.

  1. Valuation Does Not Account for Synergies Accruing to Sirius XM Holdings

Sirius XM Holdings is expected to realize significant cost and revenue synergies as a result of the Proposed Transaction, yet none of these are factored into the financial projections used in the EY Valuation or quantified in the NB Fairness Opinion.

  1. Excessively High Discount Rate Used

The EY Valuation uses a highly subjective and excessively high cost of equity of 13.95% resulting in a punitive weighted average cost of capital ("WACC") of 12% used to discount Sirius XM Canada's projected free cash flows. In light of the current low interest rate environment and consistent strong growth of Sirius XM Canada's free cash flow as forecast by its management, the Shareholder Group believes that an appropriate cost of equity should be 10% and that depending on Sirius XM Canada's capital structure, the WACC used as the discount rate should be around 9%. The discount rate has a material impact on the valuation of Sirius XM Canada, since using a higher rate leads to a lower valuation. Based on the same forecasts, a discount rate of 9% would imply a fair value range of approximately $6.25 to $7.50 per Class B share. While the NB Fairness Opinion uses a WACC of 9% to 10% to discount Sirius XM Canada's free cash flow, it fails to provide any details as to how it concluded that the Proposed Transaction is fair.

Following the release of the MIC, TD Securities Inc. published a report on August 3, 2016, entitled "Forecast Does Not Fit the Valuation" decrying the EY valuation methodology as "wildly inconsistent with the strength of the financial forecast" and determining that, using a still overly conservative 12% cost of equity, the fair value mid-point would have been $5.81 instead of $4.40, in which case Sirius XM Canada's board of directors would not have been able to recommend the Proposed Transaction.


On July 14, 2016, the Shareholder Group filed a complaint with the Ontario Securities Commission ("OSC") raising a number of concerns regarding what it viewed as threatening and economically coercive tactics used by Sirius XM Holdings in connection with the Proposed Transaction. In reviewing the MIC and related press release issued by Sirius XM Canada on August 2, 2016, the Shareholder Group believes there is clear evidence of such coercive behavior by Sirius XM Holdings throughout the negotiation process, including the issuance of a US$33.9 million demand payment for activation fees while negotiations were taking place and only 18 days before the Proposed Transaction was announced, and as explicitly stated in the MIC under "Reasons for the Recommendation of the Special Committee":

"… the significant likelihood that the royalty rates paid by the Company to the Guarantor (Sirius XM Holdings)…could increase materially upon expiry and extension of such agreements… which would reasonably be expected to impact the Company's financial condition, results of operation and prospects, including its ability to pay dividends…"

The above behavior and commentary appears to have had a materially negative impact on Sirius XM Canada's value in the EY Valuation and the NB Fairness Opinion. The Shareholder Group notes that "fair market value" under MI61-101 is defined as monetary consideration that would be paid to a prudent and informed seller "under no compulsion to act." As prudent and informed investors, the Shareholder Group believes that the public is being coerced by Sirius XM Holdings and Sirius XM Canada into accepting the current offer to take Sirius XM Canada private, and therefore views the Proposed Transaction as unfair and not in the best interest of independent minority shareholders.



The Shareholder Group objecting to the Proposed Transaction and who filed a complaint with the OSC relating to Sirius XM Canada and Sirius XM Holdings, comprise portfolio management firms that have long-established track records of patient and successful value investing, and are committed to promoting good corporate governance and protecting their rights as shareholders and those of their clients, and include:

Van Berkom and Associates Inc. Rondeau Capital Inc.
Agilith Capital Inc. Lester Asset Management Inc.
Avenue Investment Management JC Clark Ltd.

Contact Information

  • Andrea Horan, Portfolio Manager
    Agilith Capital Inc.

    Gabriel Bouchard Phillips, Partner
    Van Berkom and Associates

    Keith Graham, President
    Rondeau Capital Inc.

    Stephen Takacsy, Chief Investment Officer
    Lester Asset Management