Bear Stearns Rekindles XM/Sirius Merger Chatter

Bear Stearns out with an interesting note, saying that they think both XM Satellite (NASDAQ:XMSR) and Sirius (NASDAQ:SIRI) believe a proposed merger could likely pass the regulatory hurdles, which they think would push them to attempt a merger. However, beyond the initial warming public comments made by both companies in early January, the public potential deal talk has slowed, hampering both share prices (XM is down ~25% since its recent highs and Sirius is close to 52 week lows).

Firm believes any public progress of making a deal has been slowed by the economics of the exact split in a merged company. However, they think that the sheer value proposition of a potential deal for both sets of shareholders vastly overshadows any disappointment in share of a merged company. Due to a closing window of opportunity (based on how long we think it would comfortably take to close a potential deal), firm thinks investors would implore the boards of both companies to avoid quibbling over a few share points, to capture the much larger value of overall potential synergies. This would maximize shareholder value for both companies.

Firm provides a sensitivity of potential value accretion to XM shareholders based on the split of a merged company which they center around ~55% for XM Radio. They believe both sides would argue a higher percentage in any potential deal, but feel this center point is appropriate given the estimates in their model.

They think that upon the expectation of a successful deal, the ~$6-7B in synergies would take the value of XM's stock to ~$25, presenting significant upside potential. Hence they think both sets of shareholders would benefit greatly upon a deal. With XM trading at a lower percent of industry EV, firm thinks the stock will Outperform and recommend investors buy pre any potential announcement.

Notablecalls: The merger chatter has cooled off lately due to regulatory hurdles, taking the stock prices down as well. While this note warms up the chatter, I'm not sure it will do the same with the stocks.

Comments

[Malkiel:]

I agree with your last comment. I wish these guys would just get on with the real-world need to start making profit by cutting back a little on the programming (if you haven't covered the world of news and music in 50 channels then you're just being inefficient). The captive audience of automobiles should ensure a profitable future for both, should they be forced to continue their separate lives, if they will just economize. And no, Sirius will not collapse without Howard Stern...

2007 Feb 16 03:01 PM