Sirius/XM: A True Merger Of Equals 27 comments
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I spent the better part of Sunday morning trying to answer the question on everyone’s mind; What will happen with the stock price? I have read through analysts' reports that put such a wide range of targets on Sirius (SIRI), that I thought it might be time to pretend there were no reports whatsoever, and create my own.
Keep in mind, that mine is no better than any other out there, and you should not invest on my results. I have made a LOT of suppositions to fill in the blanks. There are just too many unknowns in the look ahead to arrive at anything but a speculative conclusion. I hope as everyone else does to hear from Sirius regarding its future plans and projections this week.
So I broke out the legal pad and calculator, printed out Sirius and XM’s (XMSR) SEC filings, and got to work. I looked at last year and assumed results as if we had a year of data to work with. Side by side and adjusting XM’s float by the 4.6 ratio, the first glaring fact is that this truly is a merger of equals.
My immediate concern is that as such, the combined company’s stock price won’t change much with the merger, assuming current valuations are accurate. Because of the synergies, however, the stock should warrant a higher combined value, as profitability will occur sooner as a merged company, than as “stand-alones.”
Going forward requires some fortune telling. I had to look at the individual expenses of the two companies and make some assumptions on where costs could be reduced and by how much. It’s my belief that the 400 million stated by the companies recently in synergies is grossly understated, as I could easily turn that into a billion dollars without trying very hard. Just look at what Mel Karmazin achieved in 2006 -2007 when he reduced the net loss by 1/2!
I then had to assume revenue growth based on what we know and also assumed revenue streams from increases in advertising and other media and licensing potentials. In the end, I can see how Merrill Lynch came to the 4.50 price target that they issued. I also can see that the 4.50 price target is based on current sat rad growth only, with some cost cutting. Citi has a much higher target, which I believe takes into account additional sources of revenue that we officially have heard nothing about, and a higher amount of synergies.
The problem I found with Goldman Sach’s assessment is that it goes against anything that the previous revenue growth has demonstrated. They seem to be assuming only one revenue stream from satellite radio and oem growth, and joining the two at the hip without understanding the basic fundamentals of increased penetration and how these subscriptions are paid for, by whom, and completely ignore any other potential sources of revenue.
In the end, I agree with Merrill Lynch, with an additional range to 6.50 should we add an extra 500 million dollars annually from new revenue streams, and cut costs accordingly.
Position: Long Sirius, XM.
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Once the merger itself is finalized you will see the 'pop'. Until then you in a technical moment of uncertainty, and the short pressure to cover is also intense.
I doubt you will see any pop. Don't you believe that investment advisors have already processed your theory and wouldn't they be buying if they agreed? After all the stock is not going to get much cheaper unless it totally collapses and folds. Also, what if the balance sheet is worse than expected.
KaptKos
Reality is that shorts will continue to put pressure on the stock post merger, but Sat radio is not dead. So expect them to stick around, but will get a small squeeze when they merge.
Once the air clears, I guarantee there will be a roadshow where Mel is paraded to most mutual funds who have had previous relationships with Mel. I've been in these meetings and Mel works a crowd like no other. There will be buyers and following what I'm assuming is the legal "quiet period" where management cannot give public comments, you will hear some good news.
However, some stocks/companies could announce they found $4 trillion in gold bullion in the company safe and the stock doesn't move. Boy who cried wolf type stuff where good news is shaken off.
Post merger, cleaning up some of the shorts on the arbitrage play and company comments, exposure, media (Mel on CNBC) should help.
In my experience, it's rare for a company to get its multiple back once it's been slaughtered. However, as much as some of you may wish for more, a double from $2 would be pretty good. Don't expect $10 just yet.
Too bad that this debt could not have been eliminated another way before the merger. However, that's the way it is.
Looking forward to the new ticker symbol-----anyone know for a fact what it will be?
What is a realistic earnings picture going forward?
I warned investors on this forum earlier not to be blind to the flaws of this business model. Those of you who hung on while vilifying me are now paying the price.