AT&T Isn't Going to Buy Sirius XM

Everyone likes to play Cupid, and a Wall Street Playbook article on Seeking Alpha this morning argues that AT&T (NYSE: T  ) should pursue a match with Sirius XM Radio (NASDAQ: SIRI  ) . Instead of spending $50 billion on widely reported plans to snap up DIRECTV (NASDAQ: DTV  ) , why not spend just $25 billion for Sirius XM?

It's not going to happen. 

For starters, unless Sirius XM's shares plunge sharply in the coming weeks and months it's going to take a lot more than $25 billion to take it over. It's not enough of a premium. Wall Street Playbook offers up Sirius XM's $19.4 billion market cap as a springboard for a buyout at $25 billion, but that ignores the satellite radio provider's substantial net debt position. Sirius XM's enterprise value is actually north of $22 billion, and that's before accounting for any of the additional shares and vested options that would kick in under a buyout scenario. Even if none of that existed, why would Sirius XM investors accept a 10% buyout premium to its $22.4 billion in enterprise value?

I know that the past few months have been disappointing for Sirius shareholders. The stock has shed 23% in value since peaking in October, and it's trading 8% lower year to date. However, is a 10% buyout premium really going to be enough for a stock that has been one of the market's biggest winners over the past five years? Sirius XM shares climbed more than 20% last year after soaring nearly 60% the year before. The company closed out its latest quarter with a record 25.8 million subscribers.

Liberty Media (NASDAQ: LMCA  ) holds a controlling stake in Sirius XM. It calls the shots here. Liberty Chairman John Malone loves to trade assets, but he's not getting out of bed for anything short of $30 billion in this scenario. As long as the fundamentals don't start to crumble there's no pressing need to hand over the country's satellite radio monopoly for a pittance of a premium.

However, it's not just a matter of Sirius XM being too good for AT&T's theoretical $25 billion parachute. The deal also wouldn't make financial or strategic sense for AT&T. It may be gearing up to pay twice as much for the leading satellite television provider, but DIRECTV generated $5.2 billion in operating profit last year on $31.8 billion in revenue. Sirius XM clocked in with an operating profit of $1 billion on $3.8 billion in revenue. Paying twice as much for a company generating eight times the revenue and five times the operating profit isn't outlandish. Even if we turn to free cash flow, where Sirius XM's sweet scalable model really begins to narrow the valuation gap, DIRECTV is still generating nearly three times as much as Sirius.

Where would Sirius XM exactly fit in with AT&T? It may be a provider of premium satellite-based services, just like DIRECTV, but there's a big difference between video at home and audio in the car (and it's not just about pricing). DIRECTV offers to bundle its pay TV platform with Internet and telephone services, a market AT&T would love to corner.

It's also fair to say that antitrust regulators -- the same ones that AT&T and Sirius XM have already run into problems with in earlier corporate combinations -- would be very dubious here. At the very least it would cost Sirius XM shareholders' time, and that's not worth the hassle for a 10% premium.

Sirius XM doesn't need a buyout partner. It's better off on its own. AT&T doesn't need Sirius XM. It's better off with DIRECTV. A combination would be a lose-lose situation for both camps. Let them both win by remaining independent.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 15, 2014, at 3:41 PM, fawazmn wrote:

    Mark my words...I believe AT&T will control SIRI in the future and will buy Liberty's 53% controlling interest in SIRI for a premium. AT&T needs as much spectrum they can. Spectrum is like GOLD to these wireless companies. The more the spectrum the better.

    "Demand for spectrum is soaring, as Americans spend more time watching video, playing games and shopping on their mobile phones. In the absence of government run sales, carriers have scrounged around for licenses as best they can. Verizon Wireless spent $3.9 billion last year buying a slug of spectrum from a group of cable companies, and AT&T Inc., along with a string of spectrum purchases of its own, has agreed to buy rival Leap Wireless International Inc. for $1.2 billion largely to take over its rights to use the airwaves. Dish Network Corp. DISH +0.13% The satellite TV operator has amassed billions of dollars in spectrum that it says it wants to use to offer wireless service. So far, however, it lacks a network or a partner whose network it could share.

    Dish Chairman Charles Ergen, a former professional gambler, has made one of the most lucrative spectrum bets thus far. Analysts estimate the airwaves he amassed over the past half decade for about $3 billion are now worth as much as $12 billion, after he persuaded the FCC to convert them from satellite to wireless use."

  • Report this Comment On May 15, 2014, at 3:47 PM, Varchild2008 wrote:

    So how will AT &T Expand their business when the FCC is limiting their Airwave Spectrum Auctions?

    Telematics via Cellphone when cellular connectiobs even for Verizon are spotty...Is not a growth problem that Direct TV could solve...It is a problem only SIRIUS XM could solve.

    It is Sirius XM with long term contracts with content providers and with their acquisition of Agero, Sirius XM already has the staff to support telematics technology.

    Seems that the tougher it is for AT & T to expand their bandwidth, the harder it is for them to pass up SIRIUS XM.

  • Report this Comment On May 15, 2014, at 4:09 PM, 67vair wrote:

    That was just an article with no merit, written for only one purpose...to get clicks. The number of articles churned out by that clown is endless and anyone who actually buys or sells stocks based on "advice" from that author needs to have their head examined. People like him are dangerous, because they try to influence, rather than inform.

  • Report this Comment On May 15, 2014, at 4:19 PM, 67vair wrote:

    That was just an article with no merit, written for only one purpose...to get clicks. The number of articles churned out by that clown is endless and anyone who actually buys or sells stocks based on "advice" from that author needs to have their head examined. People like him are dangerous, because they try to influence, rather than inform.

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