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Tuesday, September 2, 2008

The Sirius-XM Merger: Now What?

Liars Figure & Figures Lie! Why did the FCC Approve the XM Sirius Merger?

As the former XM Satellite Radio and Sirius Satellite Radio finally have been allowed to merge and now confront the fact that deal was the least of their problems. Very little is known about how they will handle the integration; the only thing the companies have said is that they expect $400 million in cost cuts. Several bigger business issues await the companies, who once argued that if they couldn’t merge together, they would collapse separately. Here are some of the challenges confronting the combining companies.
A weak auto industry: Sirius has 18.5 million subscribers and expects to add 3 million more next year from auto makers including General Motors, according to Sirius XM CEO Mel Karmazin. That would generate $350 million in revenue, Karmazin predicted. But auto sales have been slowing, hit by rising fuel prices, constrained credit and a slower-growing economy. Sirius’s second-quarter financial results provided insight into how that already has affected the satellite radio business: it added 246,221 subscribers from auto makers, well below the 325,000 expected by some analysts. Detroit’s Big Three are in dire enough financial straits that they will appeal to Congress to increase to $50 billion a $25 billion loan facility signed into law last year. A Citigroup report this week spoke of a silver lining in that news, arguing that the better-capitalized the auto makers are, the better off Sirius XM is. Still, that may be something of a stretch.

Subscriptions are slowing: In the second quarter, Sirius added a net 279,820 subscribers–less than half the 561,500 subscribers of the year-earlier period. Morgan Joseph analyst David Kestenbaum warns of slowdowns in subscriber growth both from sales to auto makers and through retail outlets, and glumly predicted of both distribution channels, “We believe the [auto maker] troubles are short-term while retail’s demise is permanent.” Many new cars also have iPod jacks, another threat to Sirius-XM’s business.
Debt refinancing: XM refinanced more than $1 billion of debt before the deal closed, but Sirius has another $1 billion to take care of within the next 16 months. Not only is the credit crunch going to make that more difficult than it would be in normal times, but the capital markets haven’t been very welcoming to the satellite radio operators. Sirius sold $550 million in convertible securities to investors in late July for what Stifel Nicolaus analysts called “a desperately low price.”

New talent is expensive: Karmazin lured Chris “Mad Dog” Russo for a new show with a contract reportedly valued at $3 million a year for five years. Shock jock Howard Stern, the crown jewel of the Sirius broadcasting empire, signed a contract in 2004 reportedly valued at as much as $500 million over five years and received as much as $306 million in 2006 if you count bonuses and other perks, according to Forbes. Programming costs for both XM and Sirius total $475.4 million, or 23% of revenue. At the same time, Sirius shares are trading at record lows, and much of Stern’s compensation is in stock. Unless Sirius wants to pay cash or boosts its stock price, it may have trouble luring more talent.

By: Heidi N. Moore
Wall Street Journal; August 28, 2008