A piece I wrote the other day dealt with a consulting project looking at various digital/mobile world merger and acquisition possibilities. A surprise to probably no one interested in Sirius XM (SIRI), I got a number of emails asking me to go into a bit more detail on the firm, a stock which I own in my personal account and, as an analyst on the sector, one that I have commented on previously.
With the 2Q13 quarterly on the books, I can say that there is nothing new to the Sirius XM story. All the reasons why I own the stock and will continue to own the stock remain in place. Positive cash flow will continue to drive the company and, over time, reduce the massive outstanding share counts and hence, increase earnings per share and drive the share price higher. Reduced churn was interesting but I'd imagine this would fluctuate over time anyway.
James Meyer, CEO, on the conference call, addressing the AT&T/Nissan deal, said, "we believe that merging satellite and IP connectivity in the car will provide superior service for subscribers."
I believe this provides valuable insight into the direction the company will take. The company has previously said that it is not against acquisitions, just that it hasn't identified any yet.
Telematics are more than just providing IP access to a car enabling maps and restaurant suggestions. The two-way feature (as opposed to radio "push") also enables accident identification and concierge services (from which General Motors (GM) generates an estimated $1.5 billion annually via OnStar). One can also easily envision a secure, wireless link between the radio and the car's computer to change engine flow calculations to improve gas mileage over time. "Sign up to Sirius XM and save every time you drive the car." This could be a major selling point to attracting and retaining customers.
The two "deals" that would be worth considering are firstly a Netflix (NFLX) - Sirius, merger of equals. They'd have the marketing slogan, "digital entertainment - anywhere, anytime." They have similar subscription model business strategies. They both are generating significant cash flow and they both are of a similar size with growth potential. Lastly, the melding of video with audio makes a perfect fit. The downside is that a comparison of their customer databases would likely show many of the same subscribers. Over time, margins would suffer as package deals are introduced although churn would likely decrease or hold steady. Still this deal doesn't take Sirius XM into the telematics market, which appears to be the desired area of growth.
The second deal option that I mentioned in the earlier note was Sirius XM acquiring one of the two satellite communications firms - Iridium (IRDM) or Globalstar (OTCQB:GSAT). Both trace their evolution to the Nasdaq bubble years, both emerged from bankruptcy after raising some $8 billion between them to design, build and launch their networks; and both have shown success and failure along the way. Comparing the two, Iridium's current system is a bit more robust. Globalstar had issues with its first generation on-orbit satellites and is rapidly trying to get its second generation network operational and into full service. Iridium is also planning a new "NEXT" generation system which also would require additional capital deployment, but neither needs resources even close to the levels of what it took to initially deploy their networks. Including debt, either firm could be acquired for a billion dollars. What Sirius XM gets is the ability to expand and access new and upcoming markets, specifically addressing their interest in telematics:
(1) Spectrum and bandwidth to provide communications and/or data.
(2) Telematics to vehicles in North America using underutilized bandwidth.
(3) Cement the link between Sirius XM and the automobile when it comes to mobile information, communications and entertainment.
(4) The ability to offer radio globally via a receiver chip inserted into new network handsets to mobile communications customers.
(5) Revenue from continuing to operate what is a small, but relatively stable niche, business that provides communications to remote areas, over oceans, etc. or spin/keep it as an independent public entity.
Although a lot of people have thrown trial balloons indicating that Apple (AAPL), Google (GOOG), Microsoft (MSFT) and even Warren Buffett should acquire Sirius XM, none of these is likely. The $21 billion market cap is usually cited but that is the wrong figure. It would likely take a 50%-100% premium for a deal to be considered. In other words, around $35 billion. While the aforementioned all have the cash to afford it, realistically from a business perspective, an acquisition of Sirius XM by any of these players makes little strategic sense. What does make sense is to consider options that enable the firm to execute on its intended strategy; and for Sirius XM, cementing its place as an entertainment, information and communications portal to the automobile.