SIRIUS & XM: A Bias Toward The Merger Closing (SIRI, XMSR)

We have been steadily reviewing all of the trading in stock and options in shares of both Sirius Satellite Radio (NASDAQ:SIRI) and XM Satellite Radio (NASDAQ:XMSR) to look at the probability of the pending merger successfully closing.

The open interest in the XMSR JAN-08 $15 Calls is over 60,000 contracts alone (equivalent to 6 million shares), and that is the month to watch because the bias of regulators and the outcome should be known by the end of this year.  This is from old volume that has carried over, but the JAN-08 $5 Calls in SIRI still has over 280,000 contracts listed in the open interest (equivalent to 28 million shares).  As far as trading volume in the stocks, this has also been impossible to ignore.  Shares of both stocks are up roughly another 4% today.  SIRI at $3.45 is more than a 15% gain in only two weeks; and XMSR at $14.10 is up over 20% in the same time frame.

Last week may have marked another turning point that tipped the bias toward XM & Sirius being able to overcome the regulatory hurdles to getting this merger approved.  That National Association of Broadcasters has been fighting this with fervor, but the chances of them blocking this merger may be dwindling even after some senators tried to go against this earlier.

This morning on CNBC, Jim Cramer stated "this deal goes thru!" and he thinks that the shares of Sirius go to $6.00 when this closes.  If the deal doesn’t get done, then it will fall to $2.50.  But he also notes that there is still something to Sirius, meaning that it won’t implode if the deal fails.  We noted the financing pact a while back that may have been a harbinger for the same.

Please note that there are still many "IF’s," "MAY’s," "possibilities," and the like.  So it is far from a done deal even if Jim Cramer endorses it.  24/7 Wall St. thinks that the deal should be allowed to go through, because one of these may fail if not and we think that higher prices will immediately come into play for subscribers if the deal is blocked.
This ball is still in the court of the regulators, and they are becoming less predictable than the rubber-stamping regulators of even last year.  It does not seem possible to state a certain outcome here because of the unknowns and the variables, but the bias has tilted back in favor of the merger.

Jon C. Ogg
September 12, 2007

Jon Ogg can be reached at [email protected]; he produces the 24/7 Wall St. Special Situation Investing Newsletter and does not own securities in the companies he covers.