Could XM & SIRIUS Merge Before Earnings?

Sirius Satellite Radio (SIRI-NASDAQ) and XM Satellite Radio (XMSR-NASDAQ) are both 1 week from earnings:  SIRI reports early morning on February 27 and XMSR reports on February 26 early morning.  The past quarters that will be reported are largely irrelevant.  The guidance for 2007 and the subscriber numbers are what will guide the street, and most important will be the question if these two are finally going to tie the knot.  The companies already gave 2006-end subscriber numbers so the actual revenues should be quite close to estimates.  UBS also made some subscriber targets earlier this month for this year.  Here are the current forecasts for the results and there is guidance for Q1 and 2007:

XM Satellite Radio (XMSR-NASDAQ)
Q4 2006: -$0.72 & $243M
Q1 2007: -$0.38 & $268M
FY 2007: -$1.65 & $1.2 Billion(+/-)

SIRIUS Satellite Radio (SIRI-NASDAQ)
Q4 2006: -$0.19 & $171.9M
Q1 2007: -$0.11 & $212.5M
FY 2007: -$0.45 & $1.0 Billion(+/-)

XMSR ended 2006 with 7.63 million subscribers and that was up just under 1.7 million from 2005 (442,000 in Q4).  SIRI ended 2006 with 6.02 million subscribers and that was up roughly 2.7 million for 2005 (905,000 in Q4).

At the current growth rates SIRI ‘could’ pass up XMSR in total subscribers around the presidential election at the end of 2008, and after next weel we should get some ‘business plans for 2007’ out of each.  These two companies have been hinted at, rumored to be, speculated about, written about, and hoped for a big merger between the two.  My guess is that whatever happens after earnings if there is no merger or no one-sided expression of interest in a merger then the street will start looking at these as individual satellite stocks again.  They might not blow off a merger hope with 100% certainty, but the cult stock traders will have much less to talk about in these names if they are going to remain independent.  Both companies are projected to lose money on a yearly basis and the street would treat any capital raising attempts with some skepticism and punishment.  There is also the question of SIRIUS on a long-term basis on its own and share values.

Bear Stearns issued a research note Friday that was almost demanding that there two companies merge.  There is going to be a regulatory issue to overcome and there is the argument over who gets more of the company, but neither are such large hurdles that they will not be able to rectify.  This created more buzz ahead of earnings and these companies should really push for this.  If they are smart they would do it before earnings so they remove any of that combined pressure.  That doesn’t mean they will at all, but the savings would be astronomical.  There is also the issue of who will rin the combined operation, and back in December we noted it could be either with one on top.

What is interesting is that just this week XMSR did a sale and lease-back of the transponders for its XM-4 satellite for some $288.5 million.  This is going to change the operational structure and it certainly just created a ‘satellite asset marketplace’ for both XMSR and for SIRI.  Have you priced a satellite launch?  It ain’t cheap by any measure, nor is the satellite itself.  There is also the music companies wanting more out of the satellite companies now.  The gains from capitalizing their satellites to unlock some of that value could be somewhat offset by higher content costs.

There are other avenues that the companies can use for future revenues and the combined companies could have more offerings than just satellite radio competition.  These companies can send all sorts of data and could potentially offer some combined services in the GPS arena (supposed to already be in the works).  The satellite as a ‘real estate play’ and as a securitized asset has already been established.  Go ahead and expect many more articles comparing these two in the coming days, and probably even from us.

Jon C. Ogg
February 18, 2007

Jon Ogg is a partner in 24/7 Wall St., LLC and can be reached at [email protected]; he does not own securities in the companies he covers.