For a little over a month we have discussed the merits of Sirius’ (SIRI) antitrust case brought upon by Carl Blessing. When I first learned about it in April, I thought to myself immediately that this was a non-event. To understand why I felt it had little merit, investors should also understand four important points made by the Department of Justice and the FCC back in 2008. At the onset of the merger, which was granted approval, the Department of Justice's Antitrust Division was quoted as saying:
- "After thorough and careful review it's determined that allowing the two satellite radio companies to merge is not likely to harm consumers."
- "The merger could actually benefit consumers, who might see lower prices as the result of more efficient operations, broader programming options, and faster rollouts of new technology."
- "The division reached this conclusion because the evidence did not show that the merger would enable the parties to profitably increase prices to satellite radio customers."
- "The competitive alternative services available to consumers, technological change that is expected to make those alternatives increasingly attractive over time, and efficiencies likely to flow from the transaction could benefit consumers."
Now we have learned that the case has been settled, something that arrived pretty much as expected. But what was not expected was the terms of the agreement and some of the language that was used. In an article titled “The Sirius XM Two-Step” I mentioned what I projected was going to be a $2 price increase in Sirius’ base subscription price upon expiration of the three-year price freeze this coming August. Due to the settlement, this is now looking less likely because the terms require that Sirius does not increase its base subscription price until December 31st of this year.
This does not mean that new subscribers will be able to take advantage of this settlement; it only applies to members of the class. One has to wonder if this news has to come as a bit of a disappointment. While the settlement eliminates a potential unknown from the company and the stock, the idea that there may now be a delay in a much anticipated rate hike could remove some of the enthusiasm that the stock has enjoyed in recent weeks.
The talk is that the settlement can be worth an estimated $180 million, of which will be paid in the price freeze in lieu of cash. Now we need to understand what this means. For those of you keeping score at home, it means there will not be a cash payout, which means this will have no impact on earnings.
The agreement also offers 4 million former subscribers an opportunity to re-subscribe by providing them with 1 free month of service as well as waiving the re-activation fee. Also if 1 million of these former subscribers accept the offer, it is then estimated that the value of the class would increase by at least $25 million additional.
The question is would these 4 million former subscribers re-subscribe? Not only would this be a great boost to the overall subscriber total for Sirius, but it would also present an immediate increase in long term revenue. But before we get excited, we have to remember the condition by which these cancellations first occurred. In other words, it might not be as easy as it appears. The “carrot” may simply not be enough to lure them back.
In a recent SEC filing, Sirius in fact confirmed the delay of its base subscription price increase as part of the settlement. Furthermore, it will maintain the price of other programming packages as well as its Internet streaming services. Additionally, existing subscribers will be able to renew their subscription plans at current rates.
Sirius XM also said it won’t object to requests to reimburse the lawsuit plaintiff for $13 million in legal fees and expenses.
The company was quoted as saying:
“Despite our belief that the claims asserted by the plaintiffs were untrue," the company said it believes the settlement is “in the best interest of our stockholders to avoid further legal expense and inconvenience and eliminate the distraction of this protracted litigation.”
I think this settlement was a good thing for the company. I believe it is one of the best possible outcomes that could have developed. Now it is disappointing that Sirius may not be able to increase its base price in August as previously anticipated. But I still feel that $2 will be the increased amount when they are allowed to do so, with a January 1, 2012, timeframe now more than likely.
Disclosure: I am short SIRI.