Analysts Note Latest Satellite Radio Merger Angles 28 comments
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A day after comments by Martin in the Washington Post were viewed as positive by the street, the FCC chairman issued more neutral talk Friday that centered on the possibility of additional or more stringent concessions being considered in the merger process.
During all of this, Stifel analyst Blair Levin issued a note saying that the end game on the merger may be close. Levin, an analyst well in touch with the FCC and the regulatory process, noted that Commissioner Tate will ultimately vote for the merger, but may seek additional or strengthened concessions. I have agreed that on the GOP side, Tate was the most likely to be a wild card in this situation. She is currently out of town on business.
In his note, Levin stated, “As of Ms. Tate’s departure, we don’t believe she had yet finalized her views on whether the merger should be approved, though we continue to believe she is likely to end up voting for the deal, albeit with some conditions that are not in the draft order currently circulating among the commissioners. We don’t know what additional conditions she would seek — and she has at times expressed a broad range of concerns – but we would not be surprised to see some strengthened enforcement actions and further details on radios and diversity.”
Commissioner Tate recently had meetings with Ibiquity as well as Sirius (SIRI) and XM (XMSR). There has been a good deal of pressure to have HD chips installed in all satellite radio receivers, and Tate has been lobbied hard by terrestrial radio groups. At one point terrestrial radio representatives forwarded anti-merger “talking points” to the commissioner.
While the theory of HD radio chips in SDARS receivers may seem consumer friendly, there are indeed issues with the concept. A major stumbling block is the business end of the Ibiquity proposal. Who pays for all of this? Ibuity told Tate that the cost is between $10 and $12 per chip. The natural question would be why SDARS should pay for even that. A second stumbling block is that the Ibiquity proposal tries to circumvent negotiations with auto manufacturers as well as hardware manufacturers. GM (GM) and Toyota (TM) came out against Ibiquity last week, and Pioneer has come out against it in the past. With major manufacturers making strong cases against the deal, Tate could have trouble bringing this issue as a concession. The third stumbling block for HD is Open Access. How open would open access be if manufacturers were required to pair HD with SDARS? What if a manufacturer only wanted to pair an MP3 player?
Levin could well be right that additional concessions may be sought by Tate, as well as other commissioners, but in the end, if Tate is the swing vote, I see her demands far more merger friendly than, say, the demands of commissioner Copps.
The draft order had built some excitement that the merger could be near. In my opinion, Martin and McDowell would vote for the merger as proposed in the Draft Order. If Tate is indeed considering deeper concessions, they should be panned out upon her return. The beginning of July has slipped into the middle of July. It would be nice to see a decision by the end of July. Anything beyond will crimp the satellite providers even more, as they are now ramping up for the all important Q4. A-La-Carte radios on the shelves for Q4 would not only be street friendly, but consumer friendly as well.
David Joyce, analyst for Miller Tabak, issued a report Thursday that begins to take into account some of the guidance issued by Sirius the previous week. Joyce sees Sirius and XM both as buys, but has lowered his short term price target on SIRI to $3.00 and long term estimate to $4.00. The analyst has a $14.00 price target on XMSR.
Joyce believes it would still be relatively cheaper to buy XMSR now rather than SIRI, based on their merger exchange ratio of 4.6 shares of SIRI to be issued for each XMSR share. In his opinion, based on the current SIRI price ($2.00), XMSR should be trading at $9.20, but it is currently at $7.79, an 18% parity valuation gap.
Citi analyst Tony Wible published a note Thursday highlighting comments from auto sector analyst Itay Michaeali. In simple terms, the analyst does not see a situation where any of the OEMs claim bankruptcy. While they do see a need for the “Big Three” to have a cash infusion, the likelihood of Chapter 11 would be offset, because “such a filing would be harmful to debt holders due to the meaningful loss of market share that would ultimately impact all stakeholders including labor unions and existing customers. A more suitable and likely workout plan entails a recap which would provide higher recoveries and fewer job losses.” Michaeli sees Ford (F) as the OEM with the best liquidity.
Wible, the satellite radio analyst, then adds what he feels the impact on SDARS would be. According to Wibble, he expects no near term disruption to unit production, but should one OEM file, the market share would be shifted by sales from other auto manufacturers. Wible made no adjustments to their OEM installation rates because they believe that the numbers they have are already conservative enough.
One point that I disagree with Wibble on is the impact if one of the “Big Three” does file. Ford, GM and Chrysler (DCX) all put a substantial amount of installations into the marketplace. If one of these OEMs were to file Chapter 11, the chipsets that are already in the hands of the OEM and subsidized will not simply shift elsewhere. While other OEMs will absorb market share, they may not be as big a contributor to SDARS installations.
The OEM channel is important to SDARS. When the sales drought stretched past 5 months, it became something that satellite radio sector watchers should pay attention to. While calling a fire sale would not be prudent, it would also be foolish to take your eye off of the companies responsible for a large number of installations.
Tyler Savery Position - Long Sirius, Long M, No Position OEMs
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MY GUESS IS ADELSTEIN ALSO VOTES YES ON THE MERGER AND COPPS ABSTAINS. $4.00-$4.50 ON THE POP
7/14/2008 Top Traders Pick: XM SATELLITE RADIO(NasdaqGS: XMSR)Rated NEW 'Strong Buy' Current price $7.81
Note: XMSR is trading at a huge discount based on the SIRI/XMSR merger share holders will end up with 4.6 shares of SIRI for every 1 share of XMSR and SIRI has a current share price of $2.13 x 4.6 = $9.79 per share instant value for XMSR share holders. XMSR stock is 25% undervalued compared to SIRI share price.
Added Note: Buying XMSR at current $7.81 is the same as buying SIRI at $1.70 per share as $1.70 x 4.6 = $7.82 per share.
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Disclaimer: The information provided above is believed to be accurate. We do not give investment advice, nor do we at any time manage or direct the funds of any person or company other than our own. Positions contained in this report are our own personal ideas and thoughts and are not intended as trading advice for readers. This report is issued solely for informational and entertainment purposes and content is not to be construed as being an offer to sell or a solicitation to buy any security.
Commissioner
Deborah Taylor Tate
Federal Communications Commission
445 12th Street SW
Washington, DC 20554
1-888-225-5322
Commissioner Tate,
I hope that you seriously consider approving the merger of sirious-xm. It is ridiculous to disallow this merger. One or both cos. will be forced to go bankrupt and then you and the rest of the FCC will be responsible for the failing of possibly both cos. This is no way to treat the public who have spent money on equipment that is not usable now because of simple political idiocy. Do the right thing pass the merger before its to late, I think 1&1/2 years is long enough to let these 2 cos. hemorrhage money.
Heck, I just want to keep my job and some cash!