Sirius/XM Merger: What Happens if It Doesn’t Happen?
The Sirius (SIRI) /XM Satellite Radio (XMSR) merger has been under DOJ and now under FCC review for longer than the Iran hostage crisis. Jim Cramer has commented that the deal may not happen. How should the stockholders expect the two stocks to react, in terms of stock price, if the deal falls through because the FCC requires onerous conditions for the merger which cannot be accepted?
As a Sirius (SIRI) stockholder, I voted for the merger. It seemed to be a no-brainer. Both companies would fare better if they could cut costs and increase subscribers via the merger, and the combined company stock price should rise significantly. But now I am not so sure that I would vote in favor of merging at this point. The reason is that during the wait for DOJ/FCC approval for X/S Radio, Sirius has been quietly gaining ground in terms of subscribers and revenue on XM. Sirius now has 8.6 million subscribers with subscription revenues of $270 million to XM’s 9.3 million subscribers with subscription revenues of $275 million.
From the Sirius Newsdesk 5/12/2008:
SIRIUS (SIRI) ended first quarter 2008 with 8,644,319 subscribers, up 31% from 6,581,045 subscribers at the end of first quarter 2007. Retail subscribers increased 10% in the first quarter 2008 to 4,643,215 from 4,234,804 at the end of first quarter 2007. OEM subscribers increased 72% in the first quarter 2008 to 3,986,818 from 2,323,683 at the end of first quarter 2007. During the first quarter 2008, SIRIUS (SIRI) added 322,534 net subscribers and achieved a 52% share of satellite radio net subscriber additions.
Total revenue for the first quarter 2008 increased to $270.4 million, up 33% from first quarter 2007 total revenue of $204.0 million. …SIRIUS (SIRI) reported a first quarter 2008 net loss of ($104.1) million, or ($0.07) per share, an improvement of 28% over first quarter 2007 net loss of ($144.7) million, or ($0.10) per share. The adjusted loss from operations for first quarter 2008 improved 53% to ($39.5) million, as compared to the adjusted loss from operations of ($84.0) million in first quarter 2007.
This all sounds very positive for Sirius and the financial break-even point seems to be in site. If subscribers continue to grow at a reasonable rate, and if Sirius raises its subscription rate by $1.00 per month, the company should be profitable within a year.
The problem, of course, is cash to cover operating expenses. Sirius only has about $250 million in cash, but XM has only $211 million in cash. Sirius had a Q1 net loss of $104 million, but XM had a Q1 net loss of $129 million. Sirius appears to have more survivability and momentum, than does XM as they both strive for profitability. I see Sirius as having much less risk than XM, although they both have a great deal of it.
So why would Sirius pay a premium of 4.6 Sirius shares for each XM share in the merger? Because they set the terms over a year ago and have already agreed to them. However, if the terms were set today they might be more in favor of Sirius.
First let’s look at the amount of debt. Sirius has an accumulated deficit of roughly $4.5 billion and XM has an accumulated deficit of $4.3 billion – not that much difference. One could argue that XM has an advantage over Sirius in terms of programming and auto maker partners, but one could also argue the other way. See here for a good side by side comparison of offerings. The 4.6 share premium seems to be based primarily on the number of shares outstanding. Siriushas 1.56B shares outstanding with a market cap of $4.32B while XM has only 320M shares outstanding with a market cap of $3.84B, a ratio of 1 to 4.875 shares and 1 to 0.89 market cap. But today I would expect that share premium, weighing the survival risk of both companies to be about 3.5 to 1.
So how will the stock react in terms of price if the merger falls through? Here is my best guess. At first, both shares will fall as the market reacts to the negative news and huge let down. Sirius would fall to around $2.30 while XM falls to about $8.00. But shortly thereafter, the two should seek equilibrium around $5.00 as Sirius rises to about $4.00 and XM stabilizes at $6.00. The long term prediction depends on how they both grow in terms of subscribers and revenue. If they both survive then they should both do well over the very long run and stock prices should keep pace with each other as they gradually rise.
I still hope the merger happens soon because I still believe that the whole would be greater than the sum of the parts, especially in the short term. But, it must happen quickly because of the lack of operating cash. At this point, Mel Karmazin, Sirius CEO, should reject any FCC demands that he has not already agreed to in order to support the Sirius stockholders and subscribers. He should also hold out the option to cancel and replace any station which has less than 10% subscriber rate for a la carte subscriptions, including minority targeted programming, in order to ensure quality programming that people will pay for. If the merger falls through, then so be it and shame on the FCC.
No merger would likely be at the expense of XM, which might struggle harder to survive. Eventually, Sirius might be the only satellite radio company left anyway, with the freedom to provide what their fans want. Competitors will not be anxious to try to enter the niche due to start-up costs and the risk of late entry.
Disclosure: Stan Muse is LONG on Sirius
This article has 164 comments:
Thank You for the information.
Are many overlooking:
* Direct TV?
** Another company acquring either company?
*** Sirius and XMSR continuing to remain in business?
eom
I personally dont see it happening though, I cant see the banks saying; We see you are only 3 to 6 months from being profitable but we just cant give you another 150 million on top of the 4 billion we have already. We would reather you go bankrupt and not get vary much back.
for some three or four years and will continue to hold in any event.
Is there a reason you're comparing Sirius' total revenue of $270 million in the quarter, to XM's subscription revenue of $275 million?
Sirius had subscription revenue of $255 million and XM's was $275 million. Sirius had total revenue of $270 million, XM's was $308 million.
Accuracy seems to be so optional these days.
Look it up.
No merger means any sell off and forces siri short positions to be covered to close out the ARB play...as xmsr falls, those funds will be used to cover siri...
You seem to make these comparisons, as if the cash and earnings are interchangeable. First of all, Sirius does have $252 million cash on hand, but they also have $100 million in credit facilities from Loral, giving them liquidity of $352 million, given their high rate of capital expenditures that they are incurring currently. XM does have $211 million cash on hand, but they also have $213 million in credit facilities available, giving them liquidity of $424 million.
You focus on the cash available, but then dont comment on the cash flow, why's that? Did you note that Sirius had Free Cash Flow of ($186 million) in the first quarter, compared to XM's ($124 million)? Yet you think that Sirius is better off? Those two figures included the $30 million that Sirius paid Sound Exchange from the Arbitration settlement and the $40 million that XM paid to even up. XM's also included the $60 million MLB prepayment for 2008, yet Sirius is better off?
You then compare the two companies Net Income, yet you dont note that XM's net loss was inflated because of the right off of their older two satellites. Or that with XM being acquired by Sirius, merger expenses are expensed by XM and capitalized by Sirius. Both moves inflated XM's net loss. For a fair comparison, why dont you look at the adjusted operating loss? Is it because Sirius lost ($39 million) and XM lost ($30 million)? Yet Sirius is better positioned?
They let anyone write these blogs, dont they?
Look it up.
As far as Stan's article I find it interesting reading and possible if all this were happening in a vacuum, but it's not. I agree with 163888's comments above, the Banks are in these companies deep, and finding financing will be a logical next step, although rates will not be as attractive.
Stan Muse
American
You all should be embarrassed, and fired! You have lied and stalled enough. 180 day clock =a scam, by the end of the year=a Lie, by the end of the first quarter=another Lie, Shortly after the DOJ decision=another lie, Martin says he was having multiple drafts written months ago=lie. DOJ has proven this is not a monopoly! Allow the licenses to be combined and stop pandering to every group out there! They have no right trying to get my Company for free, I paid for shares of my company and you have no right to give anybody anything that I own. If the minorities want more radio exposure let them go buy a radio station with their own money. This is a free country, not a socialist state. So allow the combo with no concessions other than what the companies agreed to begin with. I hope you are all investigated for this disgrace, you are going far beyond what the FCC was intended for and now you are using this unassigned power to destroy American confidence in our government, and any company you choose to destroy. Your stalling of this decision has cost me personally and many more I am sure, I hope the companies file suit for your stall tactics, the empire state building was built in less time. And both companies have now lost the Millions/ Billions due to your indecision. You have no right to cost companies so much. This is America, free market capitalism, remember? This is not a necessity it is a pay luxury service. Mr. Martin do you have a Boss that oversees you, or are you a free-bird with no one to answer to? I would like to speak to your boss because no common sense decision can take over a year to make. I don’t know of any company, employee, or anybody that can take so long to do a job and still have a job after showing this amount of incompetence. I want you and you group all fired. Here is a link to a video that shows how irrelevant you group is; www.youtube.com/watch?...
So in ending you appear to be protecting your buddies at the NAB, and pandering to any special interest group wanting something for free. How about the Americans you supposed to be protecting? By the length of time you have been taking means one thing to this American and that is you are saying FU to ME. And I want you Fired. I will be sending this to anyone that will read it, the sad thing about that is that unless it is accompanied with a check, I assume no government official will read it.
Signed; One disappointed American.
American
Stan Muse
in the end, this is all accounting gimmicks to preserve ARPU legitimacy at SIRI...they get just enough up-front revenue to be able to count the widget. leveraging bookkeeping techniques to recognize deferred revenue helps keep the ARPU numbers looking solid.
i think nate davis's point is more that XM could restructure its deals...and in doing so would allow it to recognize subscriptions much sooner than it does today...and if it did, it would have significantly more subs as a result. that, though, wouldn't get beyond the fact that the word "subscriber" has a certain connotation to it (that it's a person, paying to listen to content) and the nuance that SIRI chooses to use (we got paid for it, but the radio's sitting in a parking lot somewhere with no one listening to it) may not be fully understood at first glance.
Bush should be ashamed. Kevin should have been fired 90 days ago, at least.
I wish there were more posters like Dissapointed American. The lack of a decission is 100% BS, and Kevin and his posse should be fired.
I will agree, about both being creative with the accounting though.
Are you implying that XM is lying on their cash flow and earnings statements? Or about their liquidity? Debating over non-GAAP metrics is one thing, but implying that they are lying on their financials is felonious.
You can argue over XM's claim in not counting parking lot subs, even though I cant help but notice that you dont mention that the majority of those parking lot subs XM DOES receive revenue from. You ignore that fact. You see, for every claim you make about XM, you leave out the other side of the debate. Which was my point in commenting on this blog entry.
But none of this matters, all I was pointed out is that both XM and Sirius are equally in difficult positions. To say that one is better off than the other without the merger is disingenous. Both are in serious trouble, Sirius is equally in as tough a position as XM.
So your take is that XM is commiting a crime by falsifying their financials filed with the SEC?
The depths that some will go to make one company look better than the other is astounding. It is this kind of thinking that clouds ones judgement.
thanksgovt, and sompsonic, You both sound like dumb ass democrats that cant come to grip with what your own parties ideology is. Do ether of you read, why dont you read the Reuters article I told you about and then come back and try and claim that dumb shit. Where are you two going to be when Martin is hauled in front of a democrat congress, because the 2 democrats on the board went crying to congress and told them; we were not heard, we had plenty of other things that needed to be gone over, this merger should have never been approved. Are you going to write congress and tell them what they are doing to Martin is bullshit, some how I dought it.
that said, not sure how you can make the judgment that one operator's OEM deals are "better" than the other...not even attempting to argue the point. but, without significant insider info from both sides, i'm not sure how you can take such a position without the risk of being waaay off base.
no, i'm just pointing out that your original comments on XM's OEM business were off the mark...XM hasn't tried to "include" parking lot radios in any of its reporting -- what it has taken some effort to do, though, is provide an accurate apples-to-comparison -- something i think a rational investor appreciates.
there's more than one way to skin a cat here...you wouldn't count the parking lot subs unless you got paid for them...you wouldn't get paid for them unless you restructured the deals...you wouldn't restructure the deals unless you could do so in a way as to make the change in revenue recognition transparent to your current financials.
so, it's a shell game, but one that has a TREMENDOUS potential impact on your ending subscriber count.
Cut and pasted from YOUR blogs...
subcribers, dept, acquring, cuurent, vary much, amzingly, subcrription, subcribtion, subcribing, lawers, bankruptsy, btwn, planty, hult, Vary few, decission
As to the being president, that is realitivly simple, most (that does not include libertarians) want/like power and there is no more powerful job.
And by doing so you affectively changed the subject from my point in commenting on the blog. I am not here to discussion sub numbers, ARPU or other non-GAAP metrics. My point here was at first to point out that the author of the article had their facts wrong with regards to the revenue comparison they made; and secondly to point out cash flow, cash on hand, liquidity and other earnings metrics, such as the adjusted operating loss.
For some reason you took it upon yourself to start off a rebuttle of me by stating that you dont trust XM's numbers anymore, but dont make it clear as to whether youre commenting on their financial numbers or subscriber numbers. If your post is regarding the former, then you discuss away without me, I am not here to discuss sub numbers, nor did my comment have anything to do with sub numbers. If your post was regarding the latter, then lets discuss. Please challenge the claims that I made with regards to the cash on hand, liquidity, cash flow and earnings of these companies.
You see 163888, my commenting here has everything to do with responding to a blog that I felt did not accurately portray the current situations of these two companies, with regards to earnings and cash flow. Your being here appears to be to turn the discussion elsewhere, which you are more than welcome to do, just without me.
Also I have said I agree, that it is a shell game in accounting. One has better ARPU the other has better SAC, and so on and so on, all because of the way they count subsribers and the deferred revenew of it all.
I am a one time investor in both companies. I am not as bullish on this sector as I once was. Scaling content costs and other expenses (such as OEM expenses), without the reciprocal improvements in margins that I had hoped, has made this a much higher speculative investment than ever before. And this goes to both companies, not just XM.
In the event the merger goes through, provided the claims of Cowen are true, that the refinance of XM's puttable bonds is a done deal, then there is hope for this sector. However, if the merger does not go through, then I see severe risk in holding either company. While Sirius may have slightly better growth, with perhaps better structured OEM deals (from a cash flow standpoint), their need for liquidity is going to be much higher than XM in the near term. The need to finance significant capital expenditures is going to put this company in as much risk as XM is with their slightly lower growth rate and more expensive OEM structure. Plus with XM's already in place credit facilities, they already have higher liquidity than Sirius with lower cash burn.
Which was the point to my posting here, that there is inherit risk in this sector with no merger. To claim that one is better than the other without fully looking into all aspects of the financials is a risky move.
Then to see comments and assumptions that XM will go bankrupt and whether or not anyone will buy them out of bankruptcy is an exercise in futility. Without a merger, the risk of both going bankrupt is significantly increased. You have two companies with similiar amounts of debt, similiar amounts of accumulated losses, similiar losses and similiar capital structure (with a slight advantage to XM, given their higher liquidity).
XM also does have the advantage of having a newer infrastructure, while Sirius is in the process of replacing the major assets in its infrastructure. This replacement risk and need for capital expenditures for Sirius will weigh heavily on Sirius in a no merger world.
The FCC is going for the world guinness record.
And Idiot that I am ,went for the ride.
Good luck to everyone it's going to be a demoralizing journey.
A bit of a correction here, XM has not sold out of its ownership of XM Canada, nor did they reduce their ownership. They still own the same number of shares of XM Canada that they always did, in fact, XM recently purchased a convertible unsecured subordinated note, issued by XM Canada. So their ownership will eventually increase. What XM has done is lower the carrying value of its shares in the company, by writing them off as non-cash impairment charges. This did not raise cash for XM, nor did it cost them any cash too, but it did increase XM's loss on their income statement by $36 million in 2007 and $58 million in 2006.
As for leaseback of satellites, XM sold the transponders on one of their new satellites in a 9 year leaseback deal that is carried on their books. They still own the satellite and are depreciating it accordingly. But they are also paying quite a bit in return on the leaseback, over the 9 year period. I never said that Sirius would not be able to do such a thing. However in doing so, while it does raise cash, it also increases the indebtedness (and risk) of the company. Furthermore, Sirius would need to find an investor willing to purchase the transponders from them, in a leaseback deal. This is the risk that I'm referring to, Sirius must find an investor willing to do it, in an increasingly difficult credit market.
The need to finance the capital expenditures is still there. Whether they do it on their own through their own issuance of shares or bonds to raise the cash to fund the replacements, or if they construct, launch and then leaseback the satellite(s) like XM did, it is still considered financing and still a risk. Any amounts raised is increased indebitness.
Says nothing about selling here:
"In December 2005, XM Canada, a related party, issued to XM 11,077,500 Class A subordinate voting shares representing a 23.33% ownership interest and 11% voting interest in XM Canada. These shares were determined to have an initial fair value of $152.1 million, based on the XM Canada initial public offering price of C$16.00 per share. XM accounts for its ownership in XM Canada using the equity method of accounting.
During June 2007 and December 2006, the Company reduced the carrying value of its equity method investment in XM Canada due to decreases in fair value that were considered to be other than temporary and recorded impairment charges of $35.8 million and $57.6 million, respectively, to Loss from impairment of investments in the Consolidated Statements of Operations. XM Canada’s shares trade publicly on the Toronto Stock Exchange under the symbol “XSR.TO”. The fair value of the Company’s equity method investment in XM Canada is determined based on XM Canada’s quoted share price on the date of the most recent financial statements, which precedes the Company’s by one month. The quoted market price on November 30, 2007 (the date of XM Canada’s most recent financial statements) was C$5.85, or US$5.85.
Based on the number of shares held by the Company, the fair value of the Company’s equity method investment in XM Canada was $64.8 million on December 31, 2007. The carrying value of the Company’s equity method investment in XM Canada was $30.1 million and $74.3 million at December 31, 2007 and 2006, respectively."
INITIAL VALUE - $152.1 million
IMPAIRMENT CHARGE #1, December 2006 = minus $35.8 million
IMPAIRMENT CHARGE #2, June 2007 = minus $57.6 million
June 2007 VALUE - $58.7 million
December 31, 2007 VALUE - $64.8 million
XM certainly wouldnt be carrying all of this on their books if they didnt still own the shares.
Now the FCC has the hot potato and they can't get out of their own way due to the special interests.
Has there ever been a merger that is so overwhelmingly approved by consumers get held up like this??? It's a subscription service! We can choose to cut it off any day we want. No contracts.
The problem is, if they Leaseback this increases the indebtedness of the company by that amount. If they need $750 million to finance the capital expenditures in the near term, and they do it through leasebacks, then this is the amount that their debt will increase by. Doing it in a time where getting favorable credit is more difficult, Sirius may be faced with less than favorable debt.
The underlying point I'm making is that Sirius is no better off than XM currently.
P.S. - I inadvertantly flipped the impairment charges in the previous post. It should read $57.6 million in 2006 and $35.8 million in 2007. But it has no impact on the current value.
thanksgovt., First of all think about it, your position that Martin is getting something out of delaying this is nuts. Look at it this way if he was getting something for delaying it why not just vote to not approve it with the two democrats (hell with him voting to denie it he would be able to get at least one more republican to vote with him), In that case if he gets something for delaying it he would get alot more for not approving it right. Plus there is another major up side to that he does not have to worry about any back-lash from congress. You see how your Martin getting something for delaying this is. It would be easyer to just denie it altogether.
The reason I have said it so many times, is I want people to write! the right people, the ones that are holding this up. When the two democrats see the crap coming Martins way, I can see them saying to themselves hey why not keep this going we are not being blamed for it, its not hurting us any. But now if people were to say I was a life long democrat, but after seeing what you 2 are doing to delay this merger, I can no longer be in this party. That now puts all be it a little bit, of pressure on them.
I will say something that I have not said before in a long time (about 4 to 6 months ago pain and killerkaul might remember) on a Barrons article. That there was a press release. saying there was one republican that was a wild card, and could go ether way. I bring it up now because Tyler Savery said the same thing on last Thur. Sirius Buzz show.
We will know though when a vote comes, if it is a 3 to 2 vote with basically only the concessions Mel K. was willing to do. Then it was the democrats stalling this. If it is 3 to 2 and some major concessions like 10%, over the 5% that public knowledge wants, of spectrum given out then the time delay was to get the other republican on board. If it is 4 to 1 then Martin was really afraid of congress and felt he needed the other democrat, plus major concessions would be a given. It will never be a 5 to 0 vote, because Adelstein will never vote for this merger. That was clear after he commented that; The FCC needs to look at this merger more deeply because the DOJ did not do their job in approving it like they did.
First of all "Spellchecker&quo... .....Phguuuck Awphhfffff! Get it! Had to do that.
You guys have evaluated these stocks in a way that has me giving you folks respect for your great incite into the contractual deals, accounting, satellite depreciation, and all that stuff that makes the company work...or not. And I appreciate the detail. 8's I don't think anyone researches and knows these stocks much better than you, although today I found a deep respect for "birdman's" thorough understanding of these company's fundamentals. I applaud you both.
Siri's stock closed at $2.62 and is still floating down.....There is no new news on these stocks, and investor wealth is again being lost.
birdman264.... these stocks are risky. very risky, speculative, volatile and currently held hostage by the FCC. They are still a viable investment if you apply all that you know and "buy in" at the right price and dollar cost average over time. That does take some "Balls" though. You need to actually put what you know where your money is... like I know 8's has.
As two companies that have not made a profit, they will use every means possible to project themselves as viable. That's not accounting, its called "MARKETING".
As I have said before, if they could've been profitable by now, the FCC would be a non issue. "They Would Not Have Proposed The Merger" and we would all be talking about how much money we made.
But here we are. The FCC and every special interest, minority interest, future job seeking, scum sucking politician (and I beilieve them to be Democrat not Republican, although there is no such thing as a non scum sucking politician), are keeping this merger on the table because they can. They do not care about you, me, or your wishes for them to VOTE on this merger, up or down.
Oh and by the way...."disapoint... American".... I am all about free speech... and you certainly have gotten your message around the blogs....Good Job! But it is getting old and your preaching to the choir....just my opinion...free speech and all that.
hraunfoss.fcc.gov/edoc...
Now--it would seem to me that he is saying that he is for the public and not the "media giants"-well--GET OFF YOUR ASS AND VOTE FOR THE MERGER.
As for spellchecker, well you know how I feel about that crap. On top of being hit from all sides and trying to check the market the last thing I was worried about was typos. You would think, if you were going to correct somebody else you would make dam sure your own shit was spot on. He was to easy of a target for me to let go.
I agree birdman264 does, but I think he took offence at my berate of XMSRs quarterly call. From that point on we were not on the same page. His point was that both are iffy, Something I can agree with less now then when we got in. My point was the way XMSR tries to get away with fictitious sub numbers. The confusion was my fault though because I was being sarcastic about my point which had nothing to do with his.
cos1000, I agree about politicians being bastards. I can also tell you that if I thought for a second that it was the republicans holding this up. I would be 10 times as hard on them, as I am on the democrats. The reason is it gos against our ideology and would turn off fellow republicans, because we are not as dumb as democrats, and we know who to blame.