Once The Justice Department cleared the merger of Sirius (NASDAQ: SIRI) with XM Satellite (NASDAQ: XMSR) and there was some anticipation that the deal would get done the shares of both companies should have gone up. A year ago, the combination was viewed as a dream deal.

If anything, the shares dropped. Sirius is below $3 and XM is below $13. The market began to realize that the year which was wasted on getting government approval was a year the companies need to stay competitive. XM has over $1 billion in debt. Refinancing it in the current market would be nearly impossible. Selling shares would lead to extremely large dilution.  As we recently noted, Goldman Sachs even put Sirius on its "Conviction Sell List" with a price target of $2.25.

Growth at Sirius has slowed considerably. In the fourth quarter revenue rose only 29% to $250 million. But, for the full year, revenue was up 45%. Subscriber deactivations in the fourth quarter were almost 540,000 compared to 330,000 in the same quarter of 2006. The firm’s net loss was $166 million. Long-term debt was almost $1.3 billion.

The market is also concerned that combining the two companies may not lead to big cost savings, at least not initially. Sirius and XM run on separate satellite platforms. As The Wall Street Journal points out "The companies’ combined 17 million subscribers have radios that aren’t interoperable. Radios that can receive signals from both companies likely wouldn’t be available for at least a year after the merger – and a year or two after that for customers who get satellite radios via new car purchases."

Sirius and XM also face competition which did not exist when they were started. Near the top of that list are HD radio, the Apple (NASDAQ: AAPL) iPhone, and a host of cellphones that download and play music.

If the new company does run into debt service problems and needs to find a buyer, the cost of the common shares is likely to be over $4 billion, unless the situation gets extremely bad. The debt of the two operations taken together is well over $2.2 billion.

The most appropriate buyer for the satellite radio company would be Clear Channel (NYSE: CCU) which has over 700 radio stations.  The odds that regulators would allow a de facto monopoly in the radio business puts the chances of this at is close to zero.

Since the car companies are the major conduit for satellite radio sales one of them might buy the firm to keep it operating. With market caps of under $15 billion, GM (GM) and Ford (F) are not candidates. With a $161 billion market cap, Toyota (TM) could swing a deal. But,the US car companies might raise a stink about their largest competitor providing the service. It is just the kind of thing that Congress likes to hold hearings over.

There is a theory, a weak one, that one of the telecom companies, probably Verizon (NYSE: VZ) or AT&T (NYSE: T) would want to own a satellite radio company to offer another service to bundle with cellular, broadband, TV, and landlines. The larges cable companies, Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC) would have a similar incentive. Sirius and XM should have over 20 million subscribers by the end of this year. But, the analysis of how many of those customers could be "cross sold" bundled services probably would not justify the cost of an acquisition.

In the end, that leaves the satellite TV firms, Dish Network (NASDAQ: DISH) and DirecTV (NYSE: DTV). DirecTV has the larger market cap at $29 billion. That makes it a more likely buyer. The company has 17 million customers and 1,800 digital audio and video channels. DirectTV had $617 million in operating income in the fourth quarter of last year. John Malone’s Liberty Media Corp owns 470 million share of DTV. That would make Malone the key to any decision. DirecTV knows that programming and technical aspects of satellite-delivered content as well as any company.

There may be no logical home for Sirius, and that may be why the shares trade so low.

Douglas A. McIntyre

Some of these names have been discussed on our open email distribution list as well as been under review for our "Stocks Under $10" weekly newsletter.

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