Sirius and XMSR: Merger, Apple Buyout Among the Possibilities

Includes: AAPL, SIRI
by: Greg Wilder

After great quarters for both Sirius Satellite Radio (NASDAQ:SIRI) and rival XM Satellite Radio (XMSR), merger and takeover speculation has picked up and continued to make its way around. ( initially reported merger and takeover rumors between SIRI and XMSR in July of 2006.)

Both companies are growing and appear to have good future potential; however all of the takeover and merger speculation that has been going around has affected the valuation of the stocks. Some have argued that the shares are not overpriced as merger and takeover premium could be built in.

XMSR has typically been the target of the takeover rumors, as it has the smaller market cap of $3.7B. XMSR posted a positive surprise on its earnings, losing less than expected per share (-$0.32). XMSR has cash and securities of $211M.


SIRI has a much larger market cap of $5.8B. SIRI also posted a positive surprise on earnings (-$0.12). SIRI has cash and securities of $324M.


Analysis of Merger Rumors

Recently, Stifel Nicolaus analyst Kit Spring in a research note said:

We see significant upside potential to our target if Sirius (SIRI) makes a merger bid for XMSR, a scenario which we see as increasingly likely.

However, we had heard in early September that UBS had hosted a conference call with the chairman with the FCC who made it clear that the FCC would not allow a merger in the satellite TV or satellite radio sectors.

After digging around some more for an exact quote we were able to find out that the question to and the answer from the FCC chairman was probably misinterpreted, and that the FCC indeed may not block such a merger.

Analysis of Takeover Rumors

In addition to merger rumors, takeover rumors have also been circulating about XMSR and SIRI from outside companies or private equity firms.

As cash reserves for both XMSR and SIRI are not extremely impressive, a leveraged buyout is not as likely.

Apple's interest in satellite radio

Apple (NASDAQ:AAPL) currently has a market cap of $70.3B with cash and securities of $4.3 B -- enough to purchase XMSR clean with cash if so desired.

AAPL has been a rumored acquirer of either XMSR or SIRI over the past few months. Patents that have been dug up from last year have shown that Apple has been interested in experimenting with satellite services. However, in December, Sirius Satellite Radio’s CEO asked for a deal with Apple but was rebuffed.

This spurred speculation that Apple could be planning to create their own satellite radio station linked to iTunes and even their iPods instead of using an existing satellite radio service. A possibility that has been mentioned is that an in-vehicle-receiver-player would connect iPods to an in-car network. They would show metadata from the live satellite radio programs and let users mark songs that they would like to purchase on iTunes later.

However, creating such a service and getting the user base could be a difficult task and thus Apple may be more interested in a purchase of an existing satellite radio company. Instead of creating its own service, AAPL could buy XMSR or SIRI and already have a clientele to immediately integrate. Many users of XMSR and SIRI would most likely already have iPods and would integrate easily into Apple’s products.

Commentary has typically mentioned XMSR as a more attractive takeover target to AAPL, as XMSR has a lower market cap, offers 40 more channels, and has 2.3 million more subscribers than SIRI.

In summary, it is possible that we could see a merger between XMSR and SIRI, or that we could see a larger company like AAPL acquire them. The previous commentary and rumors that the FCC would block such an acquisition may have just been misinterpreted.