A Taipan Financial News Report (Sign up Free!)

In this article
Sirius Satellite Radio is stronger financially than XM Satellite Radio, but that doesn't mean it's acting smart on this satellite radio merger…
XM Satellite Radio hasn't reported a profit in four years… so why does Sirius want it?
The House Judiciary Committee is already planning an Antitrust Task Force and a public hearing to analyze the pros and cons of this satellite radio merger…

I had the pleasure of speaking on air with the Stock Dr. himself, Mr. Lee Seiler, on his syndicated radio show this morning.

(You can rattle around his site here.)

We spoke for 15 minutes about the Sirius Satellite Radio (SIRI:NASDAQ) acquisition of XM Satellite Radio Holdings (XMSR:NASDAQ). And, if you don't already know, I hate it. I despise it. I hope it doesn't get approved.

Most importantly, I think Sirius has made a terrible mistake in picking XMSR as its acquisition target.

While shareholders will give a yay or nay on the deal officially in the next six months, it's important to note that they're currently voting with their money… and the money is flowing out, not in.

Satellite Radio Merger: Earnings News Flattens SIRI and XMSR Gains

There's no doubt that Sirius is the stronger of the two. But that doesn't mean it's doing incredibly well. The company still reported a net loss for the fourth quarter of 2006, down $245.6 million or 17 cents per share compared with a loss of 23 cents per share a year ago. Granted, its revenue rose 142% to $193.4 million.

The company stated, in a forward-looking statement, that it expects more than 8 million subscribers on the books by the end of 2007 and $1 billion in 2007 revenue, no doubt fueled by dreams of acquiring Sirius and its revenue.

Want to learn more? Get Market Report! Sign up Free!

That just makes me laugh. Come on people, XM Satellite Radio is in the dirt. The company has never (and I mean NEVER!) reported a profit. While it announced a 45% increase in revenue over the same quarter a year before, the company lost a whopping $263.1 million loss, or 90 cents per share!

Included in that loss was a one-time charge related to the declining value of its 23% stake in Canadian Satellite Radio (XSR:TSX). Since early 2004, XSR has fallen nearly 50%, from CAN$15 per share to CAN$7 per share.

On all of this earnings news, investors in tech and in SIRI and XMSR are not amused. SIRI has retraced back to pre-merger prices at $3.68 per share, below all three major moving averages. XMSR, oddly enough, is doing better, as investors probably see Sirius as the satellite radio provider's last hope for success. XMSR stock is still resting on 10-day and 200-day Moving Average Support… but RSI is still falling and could very much take the stock back to its historic low of $9.63 per share.

So let's get this right: One satellite radio company that posted a loss of 17 cents per share this past quarter wants to acquire another satellite radio company that posted a loss of 90 cents per share and combine their subscribers in hopes that monopolizing the industry will further both companies along on the Yellow Brick Road.

Are you kidding me?

Satellite Radio Merger: Sirius' Strength Should Be Put to Better Use

There are much better things Sirius could be doing with its money than acquiring its rival. The only reason I see this being “good” for Sirius is that it gets all of XMSR's subscribers.

Get articles like this everyday… Get Market Report! Sign up Free!

But as Lee Seiler and I agreed with on the air today, that poses a problem of twice as many channels for Sirius. Will Sirius brand XMSR under its own name as AT&T has done with Cingular Wireless? Since subscriptions to either XMSR or Sirius cost $12.95 per month, will the resulting satellite subscription plan cost new subscribers almost $26 for a gazillion channels that will be hard to navigate?

Sirius had a perfect opportunity to perform some vertical merger activity, and it threw it away.

Here are some examples:

One of Sirius' marketing partners is Dynamic Media, a premier provider of Sirius satellite radio. (It also happens to work with XMSR as well.) The company specializes in designing and installing Sirius business systems for business in every zip code in the United States.

Why not buy that company out for itself? Not only will it have control of its own marketing partner, but it would be operating in the small niche sector of messaging and background music that Dynamic Media deals with currently.

Or another idea: How about buying Directed Electronics (DEIX)? This company is a key hardware partner on SIRIUS receivers, tuners, interfaces and accessories in both the home and mobile electronics aftermarket.

This company contracts only with Sirius and not XMSR.

DEIX trades for a little less than $9 per share and is a micro-cap stock at a little over $218 million.

Wouldn't that be better for Sirius, and cheaper? It would diversify its product and services portfolio as well as its business going up against iPods and MP3 players, instead of claiming unrealistically that the satellite companies alone (without their business partners) are not under antitrust rule regarding this merger since they have to compete with wireless music players.

Instead of making smart “baby-step” decisions regarding its business in order to continue outpacing XM Satellite Radio, I fear that Sirius just signed its death warrant along with XMSR.

The government is all over this one. The House Judiciary Committee has already formed an Antitrust Task Force to hold a hearing entitled “Competition and the Future of Digital Music.”

You can read more about the Antitrust Task Force and its upcoming hearing here.

Did you like this article? Get Market Report everyday! Sign up Free!

Related Articles
Satellite Radio: Is the satellite radio merger another antitrust case in the making?
Merger and Acquisition News: Companies across the board are getting better at M&A activity, and shareholders are getting more to show for it.
Mergers and Acquisitions: Some background information on a merger between two companies putting to use the worst performing commodity of 2006.

Related Resources
Antitrust Task Force Hearing: The House Judiciary Committee and “Competition and the Future of Digital Music” - U.S. House of Representatives
XMSR's Fourth-Quarter Earnings Release: See for yourself how they're banking on Sirius to pull them out of the hole. - XMSR Website
Satellite Radio Merger: Sirius, XM argue for merger approval in bigger market. - Bloomberg