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Summary

  • With almost $4 billion in cash on the balance sheet and another $35 billion in operating cash flow, AT&T has the financial muscle to make this deal work.
  • Sirius has a market cap of $19.4 billion. I think an offer for $25 billion would get this deal done.
  • This deal makes sense on every level. The question is, will Liberty accept the offer.

Shares of Sirius XM (NASDAQ:SIRI) closed down 1.62% Wednesday to $3.22. The stock is up roughly 2% this week. But the shares are still down almost 8% year-to-date. The volatility in the stock continues to affirm the belief that there's never a dull moment in SIRI-Land.

Despite recent bearishness, last week, I issued a $3.50 price target on Sirius shares. This was based on the assumption that the satellite radio provider, which has roughly 26 million subscribers, would generate considerable interest from companies looking for an immediate position in the audio entertainment space.

From my vantage point, Apple's (NASDAQ:AAPL) rumored $3.2 billion deal for Beats Electronics, which was reported by the Financial Times' Matthew Garrahan and Tim Bradshaw, has placed a spotlight on this industry. The idea is, if Apple is willing to shell out a 60% premium for Beats, which according for Forbes is worth $2 billion, then certainly someone Sirius, which has some 21 million paying subscribers, should command something close.

The company at the top of my list for Sirius suitors is AT&T (NYSE:T). And here's the way it should be planned...

AT&T shares are down 7% over the past 12 months. The stock closed Wednesday at $36.39, up less half of 1%. But the shares have done moderately better, up 6% year-to-date. Management has come under severe scrutiny. Questions have been raised about AT&T's growth prospects. And there are those who doubt that this company has what it takes to deliver the sort of market-beating performances seen from rival Verizon (NYSE:VZ).

The telecom giant is reportedly in advanced talks to buy DirecTV (NASDAQ:DTV) for around $50 billion. This is not the first time AT&T, which has always had global ambitions, has pursued growth via M&A. Last year, there was the rumored deal for Telefonica (NYSE:TEF), which was ultimately rebuffed by the Spanish government. Then, AT&T turned its attention to Leap Wireless, which it bought for $4 billion. So AT&T is not afraid to spend money.

Instead of going after DirecTV, which doesn't make sense on any level (not to mention, is expensive), AT&T should consider Sirius XM.

Aside from offsetting Verizon, which has entered the realm of online movie streaming, AT&T would acquire immediate access to Sirius' position in the automobile. The connected car and V2V communication is the next growth area. Apple and Google (GOOG, GOOGL) are already working to lead that market. Sirius' recent deal for Agero, which it projects to generate $100 million (and counting), is an untapped value option AT&T can monetize.

Frankly, I have absolutely no confidence that Sirius can effectively grow that business on its own. Liberty Media (NASDAQ:LMCA), which owns 53% of Sirius, hasn't shown its hand to the extent that it knows what to do with Sirius' assets. Aside from using Sirius as an ATM machine to grow its own interests, Liberty seems content to let Sirius operate unimpeded.

AT&T, on the other hand, is struggling with growth. Facebook's (NASDAQ:FB) recent deals for messaging applications such as WhatsApp suggests that AT&T and Verizon's stranglehold on messaging and data are one or (perhaps) two years away from being commoditized. With Sirius in hand, not only will AT&T enter a growing audio streaming industry, the company will obtain assets that it can use to transition its messaging capabilities into the automobile.

AT&T, which already has an agreement with Apple via its handset deals, can then sell and/or redistribute Sirius' audio signals and integrate Agero into various iOS and Android-controlled vehicles. Essentially, with Sirius, AT&T would have bridged its phone/data business, which is on the verge of decline due to growing messaging platforms, by entering an untapped leader-free area such as the connected car.

With almost $4 billion in cash on the balance sheet and another $35 billion in operating cash flow, AT&T has the financial muscle to make this deal work. Sirius has a market cap of $19.4 billion. I think an offer for $25 billion would get this deal done. And Sirius would cost AT&T half of what is currently on the table for DirecTV. This deal makes sense on every level. The question is, if it was offered to Liberty, would it accept?

Source: Why AT&T Should Acquire Sirius XM