An Ignominious Death For Merged Sirius (SIRI) XM Satellite Radio (XMSR)

Over the last few weeks several state attorneys general have come out against the merger of Sirius (SIRI) and XM Satellite Radio (XMSR). There has also been talk of a new competitor being set up to keep the combined company from being a monopoly. According to Broadcasting & Cable creating a new business would require "divestiture of sufficient spectrum to create a third satellite company to compete with the new, merged entity." That spectrum would come from the merged company.

The odd Congressman and Senator are also against the merger. They are probably getting campaign cash from regular radio stations which do not want a stronger satellite-based competitor. That does not make them bad people, just good politicians.

It is now too late for the proposed merger to do either company any good, so, the merger has fundamentally failed before it was consummated. The financial fortunes of SIRI and XMSR have now nearly collapsed. A marriage cannot animate what has already died.

Sirius announced its Q1 numbers today. The company’s subscriber growth rate is not what it used to be. The firm announced a a 33% increase in revenue to $270.4 million. Sirius ended first quarter 2008 with 8,644,319 subscribers, up 31% from 6,581,045 subscribers at the end of first quarter 2007. Apple (AAPL) is improving Mac sales at a better rate.

Sirius reported a first quarter 2008 net loss of $104.1 million, or $0.07 per share, an improvement of 28% over first quarter 2007 net loss of $144.7 million. Average monthly subscriber revenue was flat at just over $10. The company has no pricing leverage, and the conditions of any merger will likely prohibit the combined operation from raising rates. Sirius still carries over $1.2 billion in debt.

Results at XM were even worse. Revenue for the first quarter 2008 rose to $308 million, a 17 percent increase over first quarter 2007. XM ended first quarter 2008 with 9.33 million subscribers, an 18 percent increase. The firm is selling more subscriptions through car companies, pre-installed in new vehicles, but people often do not renew after the first year, so figures in 2009 could be very poor.

XM’s first quarter 2008 net loss was $129 million, compared to a first quarter 2007 net loss of $122 million. Average month revenue per subscriber was about the same as for Sirius, a little over $10. XM has long-term debt of nearly $1.7 billion.

And, that is the picture Wall St. is left with. Two companies with no pricing leverage. The company that the merger would create would need to rely solely on subscription growth, leaving out one of the two critical factors which allow companies to increase sales.

The average subscriber growth rate, if it means anything, between the two companies is about 25%, and that will drop as the market penetration of satellite radio rises.

And, there is the combined debt of $2.9 billion, sitting on a balance sheet during one of the most problematic credit period in decades.

The merger is not necessary because it cannot help

Douglas A. McIntyre