Another day, another believer. Cowen & Co. analyst Tom Watts became the latest industry-watcher to wax optimistic on the chances of Sirius (Nasdaq: SIRI) and XM (Nasdaq: XMSR) clearing regulatory hurdles to get hitched. Watts predicts that the deal could be approved by as early as next month.
Yes, it's been a brutal engagement. You have to go back seven months, four congressional hearings, and a lot of lobbyist volleying to recall the original merger announcement back in February.
It seemed so unlikely to succeed at the time. However, Sirius and XM have said all the right things and made generous a la carte pricing concessions, and every new believer leaves the National Association of Broadcasters (NAB), which opposes the deal, preaching to an emptier choir.
The NAB is capable of making a sound argument against the deal. This is no slam-dunk. That should be obvious, considering that we're still talking about an incomplete deal that was announced this past winter.
However, the NAB seems a little more desperate lately, and that's not very becoming. It hung up a banner at its corporate headquarters earlier this year. The banner featured a simple math equation, with "XM + Sirius" as the numerator, "Monopoly" as the denominator, and the tagline, "You do the math."
Defending its terrestrial life
The NAB is obviously threatened. As the mouthpiece for its terrestrial-radio constituency, it realizes that a lot of money -- potentially in the billions -- can be realized in deal synergies if XM and Sirius are allowed to combine. That's why it's comical to see the NAB take XM and Sirius to task as a potential monopoly, when the combination is actually threatening the livelihood of the free AM and FM radio stations the association watches over.
When the NAB attacks the combination as bad for consumers, how can it be taken seriously? If prices inch higher and diversity thins out -- as the NAB has contested in the past -- wouldn't that be a blessing to conventional stations, which are seeing their more avid listeners flock to XM and Sirius? How can it pretend to be neutral, when it actually fears the opposite of what it's publicly proclaiming? You don't pay for lobbyists if you're impartial. There are no war banners with mathematical taunts hanging in Switzerland.
"A merged entity could raise fees, limit programming choices and be harmful to consumers," reads the tagline at the NAB's anti-merger website. It even features a dumbed-down version of its original banner as a website masthead, reading "XM + Sirius = Monopoly," for those who couldn't grasp the concept the first time around.
Again, how serious are those allegations? XM and Sirius have already agreed to offer a wider selection of lower-priced plans, some as low as $6.99 a month. While the NAB is using addition and division as promotional fodder, XM and Sirius are coming through with consumer-friendly subtraction.
So why isn't the NAB more up-front about how things would play out if the deal passes? Well, because if it publicly concedes that a little financial fortitude may find XM and Sirius passing on some of those savings to the consumer -- making it an even more formidable opponent to terrestrial players -- the deal would pass in a heartbeat.
You can't blame terrestrial radio for the hand it's been dealt. As the saying goes, it's just a pity that it's playing it so badly.
After the "Just Married" limo drives off
So what will happen when -- okay, if -- the satellite radio vows are ultimately exchanged? I wouldn't want to be short the combined company, that's for sure. Free cash flow will take a dramatic turn for the better once XM and Sirius can trim away at redundancies, spend more time marketing the service instead of smearing one another, and make a combined push at the retail level, where they have been lagging.
XM and Sirius are still strong sells at the new-car showroom, but they're not exactly Midas at the local Best Buy (NYSE: BBY) or Circuit City (NYSE: CC). That will take innovation. Now that the companies have Apple's (Nasdaq: AAPL) iPhone to contend with, they need to come out with the killer hardware solution that can be a satellite receiver as well as an MP3 player, Web surfer, and cell phone. That's essentially what the iPhone is. Anything less, and the company might as well just stay at the car lot, where it's an easier sell as a factory-installed option.
If the new company wants to matter, it will have to trump the iPhone, even if that means hooking up with Garmin (Nasdaq: GRMN) for GPS functionality or Logitech (Nasdaq: LOGI) for webcam functionality.
In short, investors don't need to let out a sigh of relief if the deal is finally approved. That's when the heavy lifting -- and the potential multiplication -- starts.
Other things to read before the wedding invitation arrives:
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