Positive Radio Merger Outcome About Two Weeks Away 61 comments
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(Update below) Monday it was made public that Chairman Martin not only would be issuing a draft order regarding the merger of Sirius (SIRI) and XM (XMSR), but that he indeed supported the merger. This is probably the most positive news that SDARS has seen since the DOJ announced approval back in March.
What Monday’s activities mean, at a minimum, is that Sirius and XM have reached an agreement in principal with the Chairman of the FCC, and likely some of the other commissioners as well, that would allow the merger to progress.
I have stated that I expected the draft order to be circulated by Wednesday. I would expect that Sirius and XM have already made a filing outlining not only the voluntary concessions that could not be mandated by the FCC, but also the other concessions that were within the power of the FCC to mandate. I would anticipate this filing to be published on the FCC website as early as Tuesday morning. This filing will give the basis for the vote that the commissioners will have within the next couple of weeks. The filing will also give the street their first look at the concession list.
It is my opinion that at this point all concession negotiations are now essentially complete, and the vote is the finish line that sector watchers have been looking and yearning for. All of this is now within sight.
Understanding that 1) negotiations are complete and 2) that Martin, who supports the merger, would not call a vote unless he was relatively sure of the outcome, causes me to conclude that a positive outcome is only two weeks or so away.
For whatever reason the street was still a bit gun shy about Monday’s news, but that may well change when we get concrete evidence of the exact conditions of approval. Monday, analysts offered various opinions:
RBC analyst David Banks outlined the timing of events, which I happen to agree with:
1) An official order is issued by the FCC.
2) The Chairman and 4 FCC Commissioners (3 Republicans, 2 Democrats) submit votes—the Republican votes are likely to come first. This is where modest additional delays could occur as one of the Republican Commissioners could refrain from voting (due to unrelated political agenda) (I, Tyler Savery believe this is Tate) unless a public meeting is held.
3) The final 2 Commissioners (likely to be the 2 Democrats—Copps and Adelstein) customarily have 10 days following the Monday after the 3rd Commissioner vote (likely to be either McDowell or Tate) to submit their votes. Precedent indicates Democrats would probably not try to delay the approval process further if 3 other Commissioners vote in favor of deal.
4) Merger is officially approved by the FCC.
I believe that Banks and his source are very correct in the timeline. If the 3 votes all happen by this Monday, then we could see the other two by the first week in July. If Sirius and XM have been successful in their meetings with Copps and Adelstein (they may have more meetings this week in my opinion), then the 10 day wait may not happen. This would allow for approval by the end of June. I have long felt, and expressed in the past, that commissioner Tate was somewhat of a wild card that would ultimately vote to approve the deal and that it was a matter of concessions.
Barrington sees a longer process and states, “FCC Chairman Kevin Martin is now reported to back approval of the satellite radio merger. The other four commissioners have not weighed in with their votes. Still, Mr. Martin’s support should strongly tilt the balance toward approval. A favorable ruling by the FCC along with the prior approval of the DOJ could enable closing of the deal perhaps as soon as over the next several weeks, though there would still be a couple of issues to iron out.”
I guess the definition of “’several” needs to be considered. I have always looked at “several” as a number greater than a “few” and less than a “dozen”. In my mind “several always translated into 7 or 8. I simply do not see the merger process going on that long.
Wachovia’s Jeff Wlodarczak sees the merger gaining approval, but feels that upside is already built in to a certain extent. The analyst stated, “We continue to believe sat radio cost structures and business models need to be right-sized for a market that is significantly smaller than the companies originally anticipated. While merger approval at this point appears to be an inevitability, a roughly $11B combined company enterprise value already reflects a very rosy scenario in our view.”
To a certain extent, I agree that the upside is limited in the short term. It will take a few quarters for everyone to fully grasp where SDARS is headed in a post merger situation. The longer term outlook in my opinion is fine, but the size of the immediate pop may be held back by battle fatigued investors.
Tom Watts of Cowen feels that the concessions outlined today are better than expected. In his note, Watts stated, “Two More Votes Needed, Likely Over Next Week. Two of the remaining four commissioners must support him, which we expect. We expect final FCC approval by the end of next week.”
I agree that the votes needed are likely in hand. The timing of the end of next week is also something that I feel is not only reasonable, but likely. Watts rates XM an outperform.
Utendahl's Alden Mahabir sees the concessions as on par with their expectations, but is unsure of the outcome. The analyst noted, “We believe it is hard to say which way the other four commissioners will vote, as they have been fairly tight-lipped in their opinion. That said, some of the commissioners could find that the transaction may need additional conditions before being approved or that the merger is anti-competitive altogether.”
While this opinion seems off kilter with my own, nothing is never a foregone conclusion until it happens. I happen to believe that Martin would not have taken this step unless he had a relative certainty about the outcome. The fact that Sirius and XM executives are making the rounds at the FCC leads me to believe that there is a comfort level on at least three votes. Mahabir has a $4.00 and $19.00 target on Sirius and XM respectively under a merger approval situation.
Janco feels that Martin's endorsement and a vote along party lines could mean approval at any point in time. In a note Monday, Janco commented on some of the conditions: “There were two new conditions that we saw: First, the allocation of 24 channels for noncommercial and minority broadcasters; and second, the notion of “open radio”. The 24 channels were higher than we had expected; however, we do not believe that SIRI/XMSR will walk away from the deal over 24 channels. “Open radio” allows any manufacturer to produce a satellite radio, which we think is a nice idea in concept; however, the limited volume will probably not be attractive to many of the CE manufacturers. Therefore, we do not believe this condition will have an effect one way or another.”
I see the conditions as not stripping away value. The channels will still be part of the Sirius and XM system, and will not be available to non-subscribers in my opinion. This means that regardless of what is on them, Sirius and XM will get value for them any way.
In my opinion, there is market confusion over Monday's activities. The step taken Monday is much bigger than many think. This is essentially a green light for the merger, and the formality of a vote is the only missing component. The concessions are not overly harsh, and do not strip away synergies or value from the deal. The conditions allow the company to preserve the existing service for the customer base while at the same time allowing for room to migrate to a single system.
There seem to be several opinions, but in simple terms, it is my opinion that this deal is now signed and sealed. It is only the delivery that we are waiting on. For sector watchers, some of the confusion that happened Monday will gain clarity in the next couple of days.
Update: The formal letter outlining the concessions of the merger was posted to the FCC website Tuesday morning. The market will now be able to digest exactly what the FCC commissioners are voting on. This letter represents the agreements that Sirius and XM have made regarding the merger, and the issues that the commissioners will consider with the draft order issued by FCC Chairman Kevin Martin. Concessions include:
A-LA-CARTE PROGRAMMING
- 50 channels for $6.99 with additional channels priced at $.25 cents each Capped at $12.95
- 100 channels for $14.99
- A-La-Carte radios will be available within three months
BEST OF BOTH PROGRAMMING
- Subscribers will receive their base service (Sirius or XM) and will get the best of the other service for $16.99
MOSTLY MUSIC OR SPORTS NEWS AND TALK
- Available for $9.99
FAMILY FRIENDLY
- An $11.95 price for base subscriptions and a $14.95 price for the best of both subscriptions
PUBLIC INTEREST CHANNELS
- The combined company will set aside 4% of the full time channels. Part time channels get aggregated. This currently represents 6 channels from Sirius and 6 channels from XM
- An additional 4% will be leased to a qualified entity which Sirius and XM have no editorial control. The 4% will be maintained as compression technology advances
OPEN ACCESS
- To be included within 1 year of the merger
SERVICE TO PUERTO RICO
- Service within three months of merger
INTEROPERABLE RECEIVERS
- Available within 1 year of merger
RATE FREEZE
- 36 month rate freeze
In my opinion the concessions outlined are not overly burdensome, and do not strip away synergies of the merger. Many concessions are outlined for public interest, and in the interest of the consumer. Sirius and XM maintain control over their network, and can grow their business as technology advances.
Position - Long Sirius, XM.
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If this weren't an important merger there would not have been so much opposition to the merger as given to the FCC----it would have sailed through.
For this writer, I view Goldman Sacs man as part of that problem and not the solution------his opinion is no better than anyone elses. Unless he is on the inside in either Siri or XMSR he cannot know what the truth is about the future of Satellite Radio.
Another poster mentioned that the merger had hurt subscriptions -------I agreel
One point that I tend to think is favorable is Puerto Rico having service------rather than it being a negative, I would think it would be a plus as it opens up a market for more customers.
Thanks Tyler for your diligence in following the info flow.
Also, you do know what I said about the concession on Puerto Rico was a joke, right. It was suppose to be sarcastic. I thought the comment I put just below, that said I just thought you guys needed a laugh, gave that away.
I take no more stock in GS analysts at 1.75, which hit his already previously projected target of 2.25 this week, than I do in Citi's analyst at $9. "Even a broken watch is right twice a Day". What I look to is increasing revenues and decreasing costs, sooner with the merger, but inevitable, even without as gross subscribers increase through OEM channels, and now Puerto Rico (maybe).
Once a decision is made, one way or the other, guidance from the companies will resume and projection models will become more relevant. I do believe the merger will go through and this stock will correct with good business plan execution, but the FCC's drama along with wild projection ranges are providing angina in the markets. Tomorrow I will buy another 10,000 shares if I can get in bellow 2.15, so try and give me at least until 10:30am before popping this stock up so I can move some stuff around...OK, thanks. Relax and buy whatever you can and be able to hold until the 1st of the year and you will be pleased at your Patient Wisdom.
Long term on this stock is a dollar cost averaging game, with an important milestone right in front of you. So buy some, bring down your average cost per share, and hold on it is and has been a wild ride.
I'm less afraid of Chapter 13 with the heavy auto industry investment already made. GM has "skin" in the game with XM. Bailouts and raids from the big guys like quixsilver is talking about are more likely. Can you imagine Balmer and Mel in the same room with the same agenda. Many opportunities have been lost fishing for bottom. RUN BLUE DOG RUN!!!!!!!!!!
(auto, music, sports leagues) that would not let the deal fall through due to financing. Even though I think chapter 13 is a slim chance I felt to be fare I had to say that it was a possibility. So please dont take that the wrong way.
Yes I am by the way I love to debate as you know.
I only hope the FCC gives us what we're looking for in their decision, and gives everyone a quick pop back to the 2.45 - 2.85 channel. This will at least give Mel some time to resell this technology to investors. I don't think current investors have much stomach for a "No" decision from the FCC. That would cause a sell off at these new levels, and all short term investors looking for a quick pop, would leave the game. A no vote on the merger would put these companies in jeopardy, mandating some other big news to change their stocks price's direction.
Killerkaul.....my purchase was late morning with 2.00-2.01 looking like a brick wall. I believe without any further bad news, 2.00 is a good point of resistance. If it breaks the Goldman Sucks analyst might be right for a day. But I feel the S&P upgrade today, even though it went virtually unnoticed by the media outlets, was timely in stopping the fall at least until the FCC decision is announced.
cos1000, I will not bring it up again, whatever we were talking about, LOL. By the way did you see what I sold that DSX for, 34.25, the stuff I got at 29.25 anyway. I also bought back more NM for 9.6 I should have probably waited till it hit 8.9, but 9.6 is close enough, We will see.
"Risk Tolerance" and having a lot of it, is what makes big money and is also what wipes out huge gains. As I have heard you say many times, your playing with the house's money. A very enviable position to be in. You and I only day trade with a small portion of your main investment in each company owned, allowing you to play the channel. We both agree in this strategy. This strategy allows us to build shares by trading the channel while bringing down my overall cost per share. This takes discipline and really is all you can do while you wait for this stock to mature in the investment market, as it matures in it's business plan execution. The "Channel" is created by the difference between real time business plan execution and investor expectation. Your play on DSX, NM, and SIRI is a good example of this strategy. Buying small amounts, compared to your total investment in DSX, at 29.25, and then selling at 34.25, allows you to buy more shares back when the price retraces. If it doesn't you still have "House" money to invest in something else that you own when it retraces. If DSX goes to the moon your main investment enjoys the ride.
The reason I went into all this detail about the "Channel" strategy is because I think to many who read our ideas and feelings about SIRI think that our investment in this company is short term and a singular transaction in total. Killerkaul and a few others know that are commitment has been many years in the making and that this isn't our first speculative investment.
Also its important to realize that if an investor is committed to long term company ownership when they bought it at 4,5, or even 7, then that same company is worth the investment at 2, providing the only fundamentals that are changing are making the company stronger. As we have already said, there are a lot of companies and organizations, with high expectations for satellite radio, as evidenced by their real dollar "skin" in this game. Patience in this investment will pay off. Nobody can say exactly when and we know there will be other hurdles to get over after the merge.