This article began as an attempt to look into the impact of the acquisition of the Connected Vehicle Unit of Agero, Inc. [CVU] on Sirius XM Radio (SIRI). The deal that was announced last month noted that it would close in the fourth quarter and that the price was $530 million. As I began to look at the connected vehicle market, it became apparent that the number of competitors, services and products lumped under the broad category of telematics was far too broad to address in a single article. This will be the first in a multi-part series examining the CVU acquisition.
At the time of the acquisition, my immediate thought was how would a half billion dollar acquisition impact the Sirius XM $2 billion share buyback program. The press release was short on data, and I wrote that very little was disclosed about the acquisition of the CVU division.
There is no mention about market share in either units or dollar volume. There is no mention about whether the division has been growing, and if so, at what rate. More importantly, from an investor viewpoint, there is no mention about whether the business is profitable and whether it will be accretive to earnings, EBITDA and free cash flow. This is somewhat surprising since many announcements about acquisitions by public companies are accompanied by a statement about whether an acquisition is immediately accretive or when it is expected to become accretive.
It was for these reasons that I was looking forward to hearing Sirius XM CEO Jim Meyer speak at the Bank of America Merrill Lynch Media, Communications and Entertainment Conference on September 12th. Unfortunately, there was very little additional information provided that was not already in the press release.
As an investor, if a company I own stock in makes a significant acquisition - I consider the $530 million purchase from Agero to be significant - I want to know all of the financial details. At a minimum, I would expect to find out the revenue, whether the acquisition will be accretive in the first or second year and whether there will be incremental integration expenses. None of this information was discussed at the conference. Meyer did disclose the following:
- he believes "this deep in my soul, that the connected car is the key part of our future"
- his belief that the connected car will follow two parallel paths; either tethered via a smartphone or building "the smartness, the modem embedded in the vehicle and run services off of that embedded platform."
- that Agero has "very strong relationships" with Honda, Toyota and Hyundai to provide safety and security services
- Sirius XM will pick up approximately 140 software engineers
The 140 engineers is the only piece of hard data that gives an indication of the dollar impact on the Sirius XM free cash flow, P&L or leverage ratios. When Meyer speaks at the Goldman Sachs conference later this week, he may disclose some financial information, although based on his previous discussion of the acquisition, there is no reason to expect very much.
One other piece of information regarding the profitability of the acquisition that should be of interest to investors was the report by Moody's following the recent debt announcement by Sirius XM. The report specifically noted the intended acquisition, and stated:
In August 2013, the company announced an agreement to acquire the connected vehicle business of Agero, Inc. ("Agero") for $530 million. This transaction is expected to close by the end of 2013 subject to regulatory approvals and is not expected to have a material negative impact on EBITDA, free cash flow or capital spending.
The opinion that the transaction is not expected to have a material negative impact is not the worst piece of news, but it is certainly a far cry from stating that the acquisition would be accretive. And, unfortunately, we don't know what Moody's considers a "material impact." Moody's further states:
The Agero business provides location-based services through two-way wireless connectivity, including safety, security, convenience, maintenance and data services as well as remote vehicle diagnostics. Management expects Agero will become a restricted subsidiary and guarantor.
The last sentence in the above paragraph indicates that Moody's was discussing the acquisition with Sirius XM management as part of its debt review. And, if that was the case, then it is also likely that management indicated the acquisition was not expected to be accretive. The other important aspect of the above paragraph was that the services provided by the CVU are based on "two-way wireless connectivity".
One of the strengths of Sirius XM often cited by those bullish on the stock is that competing services don't have the advantage of satellite delivery. The satellite signal is much less likely to be lost and there is less of an issue with the service cutting out when a cell dead-zone is encountered. The architecture used by the CVU to deliver services is based on cellular communications, eliminating one of the Sirius XM advantages.
Investors should also note that Meyer had stated that the connected vehicle will follow two parallel paths. Those paths would be using a tethered smartphone or an embedded modem. Neither would be using a satellite delivery system. Based on Meyer's view, the architecture used by the CVU would not only complement the strengths of Sirius XM, but also provide a necessary component to provide telematics services to the auto industry.
The architecture adopted by the CVU is a software solution that uses a cloud-based platform that isolates the various components to allow updates to the content, interfaces, applications, delivery methods, hardware, etc. The purpose is to allow the OEMs to modify and/or expand their offerings without having to rewrite the entire program. More detail on this will be provided in a follow-up article.
The Connected Car and Telematics
It is interesting that Meyer feels that the connected car is a key part of the Sirius XM future. It is as though this is some brand new technology. Nothing could be further from the truth. Consider this historical information from the Agero web site:
1994 - ATX Group founded. ATX has been the pioneer in automotive telematics programs in both North America and Europe, managing the first telematics program and continuing to innovate ever since.
1996 - Cross Country supports its first client with connected vehicle (telematics) services.
2008 - Cross Country acquires ATX Group, provider of connected vehicle services.
2011 - Agero is introduced as the new combined brand of Cross Country and ATX, reflecting its position as the most dominant player in the combined connected vehicles services, roadside assistance, and claims management market.
However, many of the components of telematics have been around for a long time. Start with safety and security. Does anyone even remember LoJack? LoJack Corporation (LOJN) is still around, and for those that are unfamiliar with the company, it:
created the stolen vehicle recovery category more than 25 years ago and has earned a more than 90 percent recovery success rate in recovering stolen LoJack-equipped cars, light trucks and SUVs. Globally, more than 300,000 stolen vehicles worth nearly $4 billion have been recovered using LoJack's technology.
LoJack uses a miniature radio transceiver to notify police if a car has been stolen. It requires the owner to realize the car has been stolen and notify LoJack, for LoJack to activate the tracker signal, and then it requires specially equipped police vehicles to track and locate the stolen car. Premium services include notification by phone, text message or email if the car has been moved without the Early Warning Key Pass present.
And, it's not just LoJack. Other companies have been providing stand-alone portable navigation systems for years. Names like Garmin (GRMN), founded in 1989 and TomTom (TMOAY) founded in 1991, are familiar to many who have used their dashboard or windshield mounted devices.
Today, telematics embraces far more than traffic, navigation and antitheft technology. The category also includes infotainment systems, parking assist technology, crash avoidance, location-based information services, vehicle maintenance reminders, and the applications continue to increase. It is an area where OEMs can differentiate their products.
The variety of devices, applications, delivery systems and the platforms on which they operate is extensive. Smartphones are becoming more powerful and can provide many telematics features and services. For the CVU acquisition to be successful, it must be able to provide services, content and delivery systems that are at least as good as those that are available through smartphones. And, it must be able to provide those services at competitive rates.
Liberty Media Halo Effect
Most investors in Sirius XM know that Liberty Media (LMCA) has owned a majority of the Sirius XM common stock since early this year. When Liberty gained control, its chairman, John Malone, named Liberty CEO Greg Maffei as chairman of Sirius XM. Some Sirius XM investors have commented on previous articles that because Liberty's Malone is a billionaire, he won't allow anything to happen at Sirius XM that won't drive the share price higher. This includes debt refinancings and acquisitions.
To be clear, I do not expect that Malone will do anything to deliberately destroy the share value of Sirius XM. However, I would also suggest that Malone's top priority is enhancing the share value of Liberty. If the two objectives are not aligned, his interests in Liberty are likely to take priority.
Is the CVU acquisition a perfect fit for Sirius XM? I have my doubts. And, I will not assume that because Liberty's Malone probably signed off on the deal, that it will be an automatic success.
Meyer believes that the future of Sirius XM lies in the ability of the company to compete in the connected car space. He also appears to have recognized that an important part of that strategy will lie in the company's ability to support connected car services using cellular technology. The CVU acquisition from Agero fits neatly into Meyer's vision.
In addition, the modular software architecture also provides the OEMs with a platform that should be cost efficient and allow the OEMs to provide competitive differentiation. Unfortunately, after more than 15 years in telematics, the evidence that the OEMs are buying into the CVU program is limited. Its customers are Toyota, Hyundai, Nissan, BMW and the Acura division of Honda.
Financially, there are many aspects of this acquisition that are not clear. There remains a concern about its profitability. The company, in its press release, and Meyer, at the recent conference, both had the opportunity to state that the acquisition would be accretive. Instead, the only indication about profitability came from a Moody's review that stated the acquisition "is not expected to have a material negative impact on EBITDA, free cash flow or capital spending." That's not encouraging.
Later this week, those interested in Sirius XM will once again have the opportunity to hear Meyer when he speaks at the Goldman Sachs conference. Considering how important the telematics space is to Meyer, it's reasonable to expect that he would address the size of the telematics market, the CVU market share and its profitability. And if he once again doesn't bother to address the profitability, it would be refreshing to at least hear an analyst pose the question.
Additional disclosure: In addition to my long positions, I have January 2014 $3.50 covered calls written against many of my long positions in Sirius XM. I also trade blocks of Sirius XM on a regular basis. I have no position in the other companies mentioned in this article.