The New York Post today wrote that a Sirius (SIRI) merger with XM (XMSR) could be announced as early as today.

While many are guessing or speculating on a merger between XM Satellite (XMSR) and Sirius (Satellite Radio (SIRI), very few have shown what a combined company would look like and what issues would need to be overcome.  No one can say the deal is a shoe in, but it is more than worth investigating what a combined operation would look like.

The Department of Justice might block a deal FCC may not allow a merger of the two satellite radio companies, but, if one gets into significant financial difficulty, that might change.  If they are both running very well and they are still going to grow, then they have to put on a salesman hat to win approval, but if both companies have growth issues and a potential survival issue and then all of a sudden neither can run profitably then they would have a better case of pressing the DOJ & FCC to approve a merger.  There would be some conditions, but if the FCC had to see a near monopoly or had to see yet another failure of a space venture they just might be inclined to go along without blocking the deal from the start.

There are some regulatory issues that would be there as noted, and at least Mel Karmazin has already addressed that as a real issue.  He of course also has expressed interest in acquiring XM.  If this were to happen soon before a new administration that may or may not be more hawkish on blocking mergers, the issues could potentially be worked out.  After all, there are others that have at least some capabilities of offering a competing service in the US and Canada.  Satellite radio is also not going to be deemed as important as terrestrial radio to an FCC or to a DOJ.

XMSR has a $3.75 Billion market cap and SIRI has a $5.2 Billion market cap.

Would both networks be maintained along all of the programming on every channel, or would the strongest programs be migrated to the most robust platform? Most likely a long-haul migration to the strongest and most stable platform would result with other satellites either set up for sale or geared toward other uses and product offerings not currently in development.  Sprint already has ties to Sirius, and Cingular already has ties to XM.  We already know that the music industry is looking at trying to force both companies to pay more in royalties as well.  Sirius has the Stiletto and XM has the XM Xpress or XM2go versions, and both are working on video capabilities. We also have what GM has said will be 1.8 million cars with XM factory installed over the course of 2007 and Honda with what will be some 650,000 XM installed cars yesterday.  Now that we are past the holiday season should get solid and goal-oriented 2007 projected subscriber add-ons from each company, but that is a guess on the timing based on the companies and based on industry forecasting.

Based on SEC filings, company documents, and Wall St. analysis, this is what the two companies would look like as one entity at the end of 2006:

The subscriber base of the two companies together would be roughly 7.8 million from XM. and 6.9 million from Sirius. There is probably almost no overlap between the customer bases, so the new company would probably start with about 14.5 million subscribers.  If you look later in the article you probably won’t get any solid “guestimates” out of the subscriber bases for the end of 2007 until after the end of the holidays.

Based on Q3 numbers and Wall St. projections, Sirius should have about $200 million in revenue in Q4 (Q3 was $167 million) to add to XM’s $290 million (Q3 was $240 million). So, the revenue base going into 2007 would be about $500 million.

Sirius has $323 million in costs in Q3 and XM had $301 million. However, some of those costs could be consolidated from the potential total of $625 million. Customer billing at Sirius runs about $15 million a quarter. At XM, the number is $27 million. The combined companies can probably take out $10 million a quarter. Sales, marketing, and customer acquisition at Sirius is almost $130 million. At XM, the number is about $90 million. Total costs for marketing and acquisition could probably be cut $75 million.

Sirius has general and administrative plus engineering costs of $56 million a quarter. XM has $30 million in costs on these items. The total number based on lay-offs and consolidation could probably be dripped to $65 million, a savings of about $30 million.

Before programming costs, overall expense could probably be driven down by $115 million, which would leave the combined entity with a nominal loss. But, programming costs are the largest expense at both companies. Sirius spent $80 million in the last quarter and XM spent almost $40 million. Sirius has 133 channels. XM has 170. Many of he programming contracts are long-term and extend out several years. Because of overlaps on current station deals, a combined company could drive down programming costs even after the added programming expenses in 2007.  Any savings in this area in the combined company would make the entity profitable or at least close to profitable on a GAAP basis. It should be noted that depreciation and amortization at Sirius is about $28 million. At XM it is running about $43 million a quarter.

The balance sheets represent a huge problem. Sirius has almost $1.1 billion in long-term debt. At XM that number is over $1.3 billion. Sirius has cash and securities of $350 million. XM has $285 million. So, combined debt would be $2.4 billion against about $600 million in cash. Payables and accrued expenses of the combined company would be over $500 million. To have a significant value to shareholders, the combined business would have to pay down at least $200 million in debt per year. None of the debt is due until 2009, but the majority is due by 2013. The combined company would be able to partially use cash on hand and could go to the capital markets with a new debt issue with the sole purpose of refinancing that amount due in 2009 (and with convertible debt if they were smart and/or able).

If revenue growth can continue at 10% quarter over previous quarter and expense growth can be held to 5%.

Once again, this is more of a viewpoint of what a combined company would resemble rather than a forecast of a Sirius-XM tie-up.

–Douglas A. McIntyre & Jon C. Ogg

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