Monday, February 19, 2007

Sirius and XM “merge” for $13B

Per this press release, the two cash-hemorrhaging satellite radio giants are combining in a tax-free, all-stock "merger of equals." I use quotes here because there's no such thing as a merger of equals. We know Sirius is the de facto acquirer because XM stockholders will be paid in Sirius stock and Sirius CEO Mel Karmazin will be the CEO of the new entity. Yes, XM Chairman Gary Parsons will be chairman of the new company, but that's getting into the realm of splitting hairs.

So is this a good thing?

From a consumer perspective: As a subscriber to neither of these offerings, I'm glad to be relieved of going through the tradeoffs between the two. I'm sure the cost of a subscription will go up, but having all of that content under one roof will be a good thing, although I'm sure there'll be a reduction of content where there are overlaps. Plus, the additional bandwidth could be used either to improve existing channels (I understand there's some noticeable compression for music channels), create new channels or add more interactive features.

From a stockholder perspective: The press release says analysts project $3B-$7B in cost synergies and, presumably a few of those analysts worked for the investment banks who earned a percentage on this deal. Still, obviously there's got to be quite a mother lode of synergies between two companies as asset-intensive as these. Per the terms, XM investors get 4.6 shares of Sirius for every XM share they own. Currently, XM shares are trading at $13.98 and Sirius shares are trading at $3.70, so, if the effective date were today, XM investors would be getting $17.02 apiece for their shares, which is a 22% premium. Not bad for a company that lost $666.72M last year. For investors in Sirius, which lost $863M last year, I dunno, I'd tolerate quite a bit of dilution if you could eliminate my only direct competitor and get even a billion in red off my income statement.

From a regulatory perspective: Depending on how you define the market and its competitors, this could reek of monopoly. But the fact is that there are still countless other ways to get radio content – for free. Plus, mobile devices such as iPods can carry free and subscription syndicated content in the form of podcasts. And, unlike satellite radio, you can listen to your iPod at 30,000 feet or in a tunnel. Sirius and XM have known for a long time that they were competing with a much larger universe than simply companies who can afford to broadcast from space. Frankly, if these companies aren't allowed to merge, it's not clear to me how they're supposed to survive without seriously jacking up subscription costs, which would probably kill them as well.

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