7.2 Billion Reasons to Like Satellite Radio

How big is the proposed merger between Sirius (Nasdaq: SIRI) and XM (Nasdaq: XMSR)? Let's just say that analysts are throwing the b-word around a lot lately. As in "billions."

This week, Citi analyst Eileen Furukawa's upgrading the sector. She suggests that the deal now has a 60% chance of being approved, with as much as $7.2 billion in annual cost savings if it goes through.

"If you combine the two companies, there are billions of dollars -- billions with a b -- that could be saved," Sirius CEO Mel Karmazin told BusinessWeek during a luncheon meeting last month.

"It's speculated that it could be as much as 50% of the market cap of the combined companies is potentially available in synergies," XM Chairman Gary Parsons added. "You don't find that very often."

No, you don't.

Then again, you don't often find two commingling companies that have burned through so much money in such brief corporate lives. Through the end of June, XM's balance sheet has amassed an accumulated deficit of $3.8 billion. Sirius doesn't look any better; it's carrying around an accumulated deficit of $4.2 billion.

With $8 billion in accumulated losses over the years, it hasn't been easy to be bullish on satellite radio. To help offset the sting, XM and Sirius have had to do some unsavory things to stay alive, from wrecked their income statements by loading up on dilutive shares to overpaying for their capital.

So I get why satellite radio bears sometimes snicker derisively at bulls like me. Let's see who laughs last if Furukawa is right. If XM and Sirius are allowed to combine, what will billions in savings do to a company that has a lot less to worry about, and a whole lot more subscribers -- 15.3 million and counting?

Bulls who laugh last, laugh best
A lot changed for Research In Motion (Nasdaq: RIMM) after it rolled out the BlackBerry. It began to pick up steam with every passing year, but few remember that the company posted an operating loss in fiscal 2001, 2002, and 2003. (Check out Research In Motion's latest quarter.)

Netflix (Nasdaq: NFLX) launched its service in 1998, posting a loss every single year until 2003. If you haven't checked, both Research In Motion and Netflix are nicely profitable these days.

Obviously, posting a few years of red ink isn't enough to vindicate your business model. Other subscription services, like TiVo (Nasdaq: TIVO) and Napster (Nasdaq: NAPS), continue to post annual losses.

However, even investors who give those companies a free pass still have a hard time accepting XM and Sirius, because those firms have lost so much money.

You know what I've never heard someone argue? "Man, XM and Sirius have racked up losses of $8 billion. With tax-loss carryforwards like that, operating profits will just trickle on down to the bottom line without stopping to pay the tax man."

However, isn't that the kind of scenario we're addressing, if a combined XM and Sirius can shave billions from their annual overhead? We're not just talking about centralized support, content-negotiating leverage, and smarter ad spending. Now that both companies are on the cusp of producing positive cash flow on an operating basis, doubling the subscriber base is like kicking off the training wheels and hopping onto a Harley.

We're talking a burst of Mentos-and-Diet-Coke proportions.

One can argue that this kind of boost will scare regulators away from approving this deal, but imagine how shocked they must be to find that the two satellite-radio licenses that were issued have added up to an accumulated deficit of $8 billion. That makes Motorola's (NYSE: MOT) terrible $5 billion bet on its Iridium satellite phone network feel like chump change.

The fact that XM and Sirius have made it this far, despite the industry's gashed history, is impressive. Now that they're at the altar, can they really be turned away? They've been through plenty, but the competitive landscape has changed, even in the eight months since the deal was first announced.

Music is everywhere. Trying to cork this deal? Trying to cork the billions in savings? Trying to cork the evolution of digitally delivered music that grows more pervasive with every passive stream? Be careful. That's Mentos and Diet Coke, and you're trying to hold it down with a flimsy little cork.

Other things to read before the wedding invitation arrives:

• Until Mel Do Us Part
• Fool on the Street: Before XM Kisses Sirius
• Satellite Radio Hands Out Appetizers