The merger between Sirius (SIRI) and XM (XMSR) is no longer “proposed”. It is reality. As anticipated, Sirius and XM consummated their deal prior to the market opening Tuesday, and the company has a new name….SIRIUS XM RADIO.
Among the announcements Tuesday morning were:
- Combined Company Has Over 18.5 Million Subscribers, Annualized Second Quarter Revenue Exceeding $2.4 Billion
- Company to Offer Consumers Best of Both Services, While Maximizing Significant Efficiencies
- SIRIUS XM Reiterates Financial Guidance; Expects 2009 Synergies of $400 million and 2009 Adjusted EBITDA of over $300 Million
SIRIUS Satellite Radio and XM Satellite Radio Tuesday announced that they have completed their merger, resulting in the nation’s premier radio company. The new company plans to change its corporate name to SIRIUS XM Radio Inc. The combined company’s stock will continue to be traded on the Nasdaq Global Select Market under the symbol “SIRI.”
SIRIUS XM Radio begins day one with over 18.5 million subscribers, making it the second-largest radio company, based upon revenue, in the country; and, based upon subscribers, the second largest subscription media business in the U.S. With under 10% penetration of the home and car market, the opportunity for continued growth is significant.
“I am delighted to announce the completion of this exciting merger between SIRIUS and XM,” said Mel Karmazin, CEO of SIRIUS XM Radio. “We have worked diligently to close this transaction and we look forward to integrating our best-in-class management teams and operations so we can begin delivering on our promise of more choices and lower prices for subscribers.”
“Every one of our constituencies is a winner. Combined, SIRIUS XM Radio will deliver superior value to our shareholders. By offering more compelling packages and the best content in audio entertainment, we are well positioned for increased subscriber growth. Our laser focus on subscribers will continue and listeners can be assured that there will be no disruption in service. We also believe that the completion of the merger will eliminate any confusion that has been lingering in the marketplace,” added Karmazin.
XM shareholders will receive 4.6 shares of SIRIUS common stock for each share of XM.
Competitive New Options for Consumers
SIRIUS XM Radio broadcasts more than 300 channels of programming, including exclusive radio offerings from Howard Stern, Oprah, Opie & Anthony and Martha Stewart, among others. SIRIUS XM Radio will offer these expanded options to consumers through arrangements with the world’s leading automakers and its relationships with nationwide retailers.
As a result of the merger, SIRIUS XM Radio will also be able to offer consumers new packages in audio entertainment, including the first-ever a la carte programming option in subscription media. In addition to two a la carte options, the new packages will include: “Best of Both,” giving subscribers the option to access certain programming from the other network; discounted Family Friendly packages; and tailored packages including “Mostly Music” and “News, Talk and Sports.” The first of the new packages will be available in the early Fall.
“One of the most exciting benefits of this transaction is the ability to offer subscribers the option of expanding their subscriptions to include the Best of Both services. Given the respective popularity of exclusive programming on both SIRIUS and XM, we expect many subscribers will upgrade their current subscription,” said Karmazin.
“The upside potential for both consumers and shareholders is huge. Consumers have the ease of adding premier programming without purchasing a new device. For shareholders, this kind of organic growth is a key part of the company’s future and the success we expect to see,” said Karmazin.
As promised when the merger was first announced, existing radios will continue to work and every subscriber has the option of maintaining their current service package.
Benefits for Shareholders Begin Immediately, Integration Already Under Way
SIRIUS XM Radio expects to begin realizing the synergies expected from this transaction immediately.
“In addition to realizing significant potential revenue growth, the management team will move quickly to capitalize on the synergies that many analysts have predicted for this combination. We expect to begin achieving those synergies without sacrificing any of the world-class programming and marketing we are known for,” said Karmazin.
The company Tuesday also reiterated guidance for the combined SIRIUS XM Radio. Based upon a preliminary analysis, the combined company expects to realize total synergies, net of the costs to achieve such synergies, of approximately $400 million in 2009; to post adjusted EBITDA exceeding $300 million in 2009; and to achieve positive free cash flow, before satellite capital expenditures, for the full year 2009. The company also expects that both synergies and adjusted EBITDA will continue growing beyond 2009.
“We have all the tools necessary to begin executing as a combined company with high aspirations for subscriber growth and greater financial performance in part from the significant synergies that we begin realizing literally today — on Day One. We are moving quickly to integrate the operations,” said Karmazin.
The corporate headquarters will be located in New York, NY and XM Satellite Radio, the company’s wholly-owned subsidiary, will remain headquartered in Washington, DC.
Effective after the close of the market Monday, trading in XMSR common stock on the Nasdaq Global Select Market ceased.
Investors Sing the Blues
The birth of Sirius XM Radio has many investors singing the blues. The question is how long the street will stay on the blues channel, and will the next channel be more upbeat?
With the converts arbitrage action panning out during the trading of Monday and Tuesday, it may well be that the stock has stabilized, and perhaps even marked a strong bottom that should become a very strong support point.
Many investors still have various questions, and the process of the transition still has a few more days to unwind. XM shareholders will see their accounts have shares that are able to be traded by this Friday. Those that were short XM will need to settle their trade, as the short positions do not transfer over. The XM shares you borrowed to sell short were bought by someone else, who has already (in theory) converted them to Sirius. Because of this, Friday may be an interesting trading day that sector followers will want to watch.
So how does Sirius XM Radio go from singing the blues to rockin’ and rollin’?
Strong fundamentals, good PR, executing the promises as committed, and keeping the street in the loop with guidance that analysts and investors can sink their teeth into. For the past 18 months SDARS has been marching to the beat of whatever suited any particular investor's fancy. A consistent beat will deliver confidence.
Merrill Lynch analyst Jessica Reif Cohen issued a report Monday where she reiterated her $4.50 price target. Cohen is a media analyst, and one in whose opinion I place a lot of weight. According to Cohen, “Strong operating leverage and high contribution from new subs should drive an acceleration in EBITDA and FCF. Improving trends in retail and improving conversion rates in the OEM channel should allow Sirius/XM to capitalize on the more widespread availability of satellite radio in the 245mn U.S. auto fleet. We reiterate our Buy rating and $4.50 price objective for the combined Sirius-XM.”
Cohen sees what is in essence a “THREE-BAGGER” right now. Put a quarter or two of combined operating metrics in the mix, and the confidence of investors in analysts as well as the company can improve.
Sirius XM Radio should schedule an investors conference that outlines initial projections, the path the company is taking, and expectations. This conference should be available to everyone. Investors have a glaring need to know the direction SDARS is headed, and they need to hear it from Sirius XM Radio management first hand. Do not wait for the quarterly call. Do not wait for the annual meeting. Do it now.
The fundamentals will take some time to prove out, but there are activities that can happen now that will also show the strength of Sirius XM Radio. Good PR is key. Getting the news out. Branding the Sirius XM Radio name needs to happen. Get signs into stores, and let the world know that satellite radio has been reborn. That’s all well and good, but other PR needs to happen as well. Sirius XM Radio needs to correct the damage done by the National Association of Broadcasters. They need to prove to investors and the public that the company has integrity.
- Announce the first Open Access manufacturer with pride.
- Announce the informational and minority program with pride.
- Embrace the Public Knowledge’s of the world for their opinion on how to handle the informational programming.
- Announce that those that already have a subscription to both services can now get a family plan rate on one of the subscriptions.
- Announce when the repeater towers are in compliance with pride. Don’t let past FCC discretion jade the vision of the merged company.
- Spell out exactly what lifetime subscribers and those with long term contracts will get for service and why. My opinion is that lifetime subscribers should get the service they currently get, but also get 3 months of the “Best of Both” free as a trial for being loyal subscribers. If someone still has over 1 year left on a contract, give a one month trial of “Best of Both”. This move was not required by the merger, but would help demonstrate that the company is a stand-up company that is looking out for consumers.
Do you hear the music changing? Steps such as these are confidence builders. Confidence is what the street needs. Not just in the bottom line, but in the company. Build a reputation of a premier media and entertainment company, and prove the naysayers wrong by good company metrics, being a good corporate citizen, and reversing the battle fatigued feelings that many SDARS investors have.
The merger is done, and there was a smattering of claps from the street and an undertone of the blues. Management now needs to step up to the podium, and turn those isolated claps into a thundering chorus of WE WILL ROCK YOU! Get the street as well as consumers behind this company so that it can prosper.
This Is The Spirit Of Radio. It is alive in everyone. Kindle the fire, and let everyone know that Sirius XM Radio is the real deal.
Position - Long Sirius, XM