Sirius, XM Satellite Radio: Good Things Come to Those Who Wait

Sirius (SIRI) (currently trading at 3.05) has made an approximately 4.57 billion dollar offer to buy rival satellite radio company XM Satellite (XMSR) (currently trading at 12.25). This proposed merger is a fantastic move for both companies as the two companies have both been hurt by stiff competition against one another since they began operations. A successful merger would make it considerably easier for SIRI to thrive in the marketplace without the XM competition, and XM would obviously benefit as the company being purchased.

What’s the Holdup?

Some feel that the merger would constitute a violation of Anti-trust laws. In fact, the Department of Justice ‘DOJ’ is currently examining the proposed merger to determine if said merger would amount to a violation of Federal Anti-trust laws (see Sherman Act, Clayton Act). Once a decision has been made, both SIRI & XMSR stocks will react dramatically.

Restraint of Trade?

Essentially, the question the DOJ will answer is whether the SIRI/ XMSR merger is a restraint of trade…or more importantly if there are enough competitors such that the merger would not be harmful to consumers. Opponents (namely the National Association of Broadcasters) argue that there would be no viable competitors in the satellite radio industry leading to increased prices for consumers and less innovation in the industry.

Benefits of Successful Merger:

1. Licensing costs will be lowered as the companies will no longer be bidding against one another.
2. Combing programming will give customers more listening options.
3. Combined satellite constellations lead to decreased costs in operations.

Will the Merger Be Allowed?

As previously noted, the heart of the matter is whether there would be enough competitors to a merged SIRI/XM to protect consumers. From a distance, it would appear that XM and Sirius are the only companies in the industry, and therefore, an antitrust violation would seem imminent. It is my opinion, however, that terrestrial radio, i-pods, high definition radio and other forms of in-car entertainment satellite radio provide sufficient competition to allow the merger. At the end of the day, satellite radio is not a necessity and consumers are not forced to utilize their services. Past antitrust violations have included necessity items that consumers generally use on a daily basis. (ie. price-fixing violation of milk in the state of Florida).

Additionally, since both companies have had cumulative losses since inception, and both may fail if the merger is not allowed (presumptively something that the NAB is rooting for), the Department of Justice is less not likely to quash the merger knowing that the entire satellite radio industry would likely fail if the merger is not allowed. Abolishment of an entire industry is certainly not the intended purpose of Anti-trust legislation.

Since the chances of the approved merger are strong, both XMSR and SIRI make for great buying opportunities. Both companies have sizable short interests currently (XMSR- 7.2% short; SIRI- 8.4% short) so an approved merger would force the short sellers to cover pushing the stocks higher. While the underlying fundamentals for both companies are not as strong as I’d typically like to see, an approved merger would certainly get Wall Street’s attention and both companies would likely see an increase of around 20% in a very short period of time.

SIRI/XMSR 1-yr chart comparison chart

Disclosure: none

Comments

[mobius:]

Nice try. I see you are trying to get some fool to buy your junk stock before it plummets. You know...that should be against the law. Crap articles like this are self serving. Masked as opinions.

2008 Jan 03 02:49 PM

[Scott Weitz:]

Full Disclosure: I do not currently own shares of SIRI or XM.

2008 Jan 03 05:24 PM

[staretsky:]

I completely agree with the main points of this article. If SatRad has not been able to turn a profit to date, how can it be seriously claimed that it has no competition? The merger would be only beneficial to the consumer in my opinion.
Does anyone think that the NAB's oposition is not self-serving?
Full disclosure: I have a small position in XMSR.

2008 Jan 03 10:29 PM

[boilerroom4:]

DOJ is all but done. SIRI and XMSR are currently working closely with FCC on concessions. Bashers doing a nice job of luring in new short positions. Big profits coming for longs.

2008 Jan 05 09:42 AM

[Love to short:]

Great article, you are right on the money with all of your points. There really are a number of competing products that negate any argument that Antitrust violations would exist. Both stocks are poised for solid upside, and cheers to you for spelling everything out so perfectly.

2008 Jan 05 01:59 PM

[Isaac, Rott...:]

Just think of the tons of filematerial the DoJ requested and got: 6 million pages to study.

I do realise it is important not to create a positive precedent for a
merger which is alledgedly viewed as a monopoly.

Of course, there is this 10-year-old FCC limitation in that one company should not be able to control the entire sprectum. But that was 10 years ago. Moreover, it is a merger of equals, combining forces to obtain efficiency and benefits for the consumer, their astonishing 17 Million Voluntary Subscribers!

For years I had not studied anti-trust law and boy, what subject to read. However, it comes down to recognizing market power and monopoly power and cross-elasticity -- neither do apply in this case.

In my view therefore a monopoly is 100% not the case -- as the strongest merger-opponent is the NAB: why would they worry, if not fishing in the same, wide pond? Cross-elasticity is the word; it is not as if radiolisteners have starved from entertainment before the SDARS were there... on the contrary: the market landscape has become so wide every consumer has a free choice of radioconsumption. If as a consumer you desire uninterrupted, ad-free reception and CD-quality throughout the country, driving from coast-to-coast of course you buy one, or two or soon: just one supplier of this service. If you can't or do not want to pay: fine, stick to good old FM or AM or CD or iPod or even cassette.

Even if the happily merged companies nastily would up their charges to say $39.99/month , they would shoot in their feet as consumers still have a choice and would churn rapidly. This is not about about a milk-cartel!

So DoJ, so FCC: this is 2008 go ahead, give the merger a greenlight and get back to bigger matters.

2008 Jan 16 04:30 PM