YRC Worldwide: Lessons From SIRIUS XM (YRCW, SIRI)

YRC Worldwide Inc. (NASDAQ: YRCW) is starting to do what many companies do when they have a large business with thousands of shareholders and employees with a low stock price that it is on the verge of an implosion.   The company provided a second quarter guidance update and has reconfirmed a positive adjusted EBITDA for the quarter.  The stock is surging this morning, but as with all penny stocks the situation remains unpredictable.  Perhaps YRC should use the blueprints for a turnaround from SIRIUS XM Radio Inc. (NASDAQ: SIRI).

YRC noted in a press release this morning that its adjusted EBITDA is now expected to be $35 million to $45 million.  That excludes the YRC Logistics segment, which will now be reported as discontinued operations. Adjusted EBITDA would be between $24 million to $36 million with that operation.  More importantly, the company says this figure exceeds the $5 million covenant level required by its credit agreement and would compare to adjusted EBITDA in Q1 of a loss of $53 million.  Tonnage per day in Q2 for YRC National was up 11% to 27,000 while YRC Regional was up 15.2% 26,900 compared to Q2.

As far as liquidity, the company said its June 30 cash balance was roughly $142 million.  After including its unused restricted revolver reserves of $129 million and unrestricted availability of $8 million, its total liquidity is roughly $279 million (up from $241 million a quarter ago).

The company also said that it expects to record an $83 million non-cash reduction to its equity-based compensation expense related to its March 2010 union equity-based awards, which reflects “the adjusted fair value of these awards which were re-measured as of the June 29, 2010 shareholder meeting when shareholders formally approved the issuance of union stock options to replace previously issued union stock appreciation rights.” It was in the first quarter that YRC recorded a $108 million non-cash charge related to the same March 2010 union equity-based awards.

The notion that cash and liquidity is now higher is one that will help for now.  Thew problem is that, while circumstances are different, YRC finds itself almost in the situation that SIRIUS XM Radio Inc. (NASDAQ: SIRI) found itself in back at the depths of the early 2009 market plunge.

The big difference is that SIRIUS does not have the union issues that YRC has (or had).  But YRC is still running its business on an EBITDA basis to the public.  After the crash of 2008 to 2009, investors are very reluctant to play in companies which are losing money.  Earnings before interest, taxes, depreciation, and amortization are great except that you can’t survive on that basis alone.

Having a stock that gets a delisting notice is one thing.  SIRIUS had a delisting notice, and it said it would rectify the issue through price.  Oddly enough, it did not have to complete its reverse stock split to do so.  YRC received a delisting notice on price earlier in the year and our original indications were that YRC would do a reverse split before the end of June.  It is July now and the stock is still down at $0.16 even after a huge percentage gain this morning.  The last day that YRC shares were above $1.00 was on January 15, 2010.

YRC cannot even sell shares to raise capital.  With a $164 million market cap and a share price of $0.16, how much could the company raise?  Would shareholders take a theoretical 75% dilution with the hope of raising $300 million in an equity sale?

As seen with SIRIUS, YRC needs a strong deep-pocketed investor just like John Malone.  The investor would have to work something out acceptable with creditors today that are already in line, and the investor would most likely have to be on good terms and in good standing with YRC’s union-owner group.  That makes snagging a white knight investor that much more difficult.

The reverse split we were expecting, per our notes earlier this year, was in a range of 1-for-25 down to 1-for-5.  The problem is that companies that get a delisting for price alone generally go to at least $2.00 to be more than double the limit at NASDAQ (and NYSE).  Even to get to $1.00 today, the company would need a 1-for-6 reverse split ratio.  That means a 1-for-12 is implied, if not more.

The last option is that YRC can stop the break-up process of getting units out of the company.  An outright sale  is probably still possible, even if revenues fell to $5.28 billion in 2009 versus $8.94 billion in 2008 and $9.62 billion in 2007.  Thomson Reuters has estimates of $4.69 billion for 2010 revenues and $4.97 billion for 2011 revenues.  SIRIUS has yet to reach $1 billion in revenues per quarter.  SIRIUS XM was also at the point that a buyer was an option, but the Malone investment was an investment that gave control over the company if things continued to get out of hand.  A similar structure would be needed here.

Then there is the Chapter 11 bankruptcy option.  This is the Holy Hand Grenade of Antioch scenario.  Public stockholders would get wiped out.  The bondholders would be left to fight over the value, and presumably the unions would then get to have an even larger say in the operations of the company after the bankruptcy.  It goes without saying that bondholders usually do not want to be behind a union when it comes to who gets what in a bankruptcy reorganization.  A union-owner under today’s administration and labor stance might have much higher standing as a creditor in any bankruptcy reorganization than in other sectors.   A reorganization under bankruptcy protection was a very real possibility in part of 2008 and into 2009 at SIRIUS XM, and regardless of today’s move it is a real possibility at YRC Worldwide.

The good news is that YRC might actually be able to manage its debt.  Key on ‘might.’  There are no assurances, but its trucking fleet and its real property and equipment is still valued at $1.775 billion as of the end of March.  At $0.60 on the dollar, YRC could still hopefully have $1 billion to pledge to existing debtholders and to raise for new debt to delay maturities and give it added liquidity ahead.  There is still much work to be done, and occasionally kids playing Monopoly do come back from when they start mortgaging their properties to pay their rent.

After an hour of trading, YRC Worldwide shares are up almost 40% and challenging the $0.16 price on more than 63 million shares.

This is still a very challenged and stretched situation, and it is still one that can end very badly even for new holders today.  At $0.16 per share, the price today is more reflective of a lottery ticket rather than a stock with real value.

Stay tuned.

JON C. OGG