What Now, Satellite Radio?

Something isn't right.

It's taking the FCC too long to clear a deal that the stingier Department of Justice approved last month. If Sirius Satellite Radio (Nasdaq: SIRI  ) and XM Satellite Radio (Nasdaq: XMSR  ) make it to the weekend unhitched, it will be 14 months since the satellite radio providers announced their intent to merge.

In the meantime, shareholders have announced their intent to purge. Sirius shares have fallen in each of the past seven trading days. If you think that's bad, XM has closed lower for 10 consecutive days.

Streaks are anomalies. Terrible stocks have good days. Great stocks have their bad days. If XM and Sirius end their losing ways today -- which they very well might -- it certainly doesn't mean that they have turned the corner. However, how bad are things for satellite radio if the closer they get to sealing a deal that will potentially save billions, the closer their stocks get to zero?

It's not as if the market believes that the deal won't get done. Sirius shares have fallen at a quicker clip than XM, eating into a lot of the deal discount that was baked into XM's price. The victory is only relative, though. XM investors can't be cheering their stock's 10% dip this month in light of the 16% drop in Sirius.

It's also not as if the market believes that satellite radio isn't viable. The two companies have a collective 17.3 million subscribers. That is more than the 14 million people using Research In Motion's (Nasdaq: RIMM  ) BlackBerry. It's more monthly members than TiVo (Nasdaq: TIVO  ) , Netflix (Nasdaq: NFLX  ) , and Apple (Nasdaq: AAPL  ) iPhone, combined.

Yes, XM and Sirius are posting steep losses with costly satellites to maintain, but that is why scaling quickly is so important. If the realized synergies come anywhere near the $7.2 billion in annual savings that one analyst predicts, those red-inked doubts will also be silenced.

A penny for your thoughts
So what do the two satellite radio companies have to do to get some respect around here? Could it be something as simple as the exchange ratio? XM is supposed to receive 4.6 shares of Sirius once the deal is finalized. Since Sirius shares are trading for less than $3 a share, are fund managers and other institutional investors bailing so their report cards don't show an investment in such a low-priced stock? The bountiful market cap doesn't make this a penny stock, but the stigma is there.

I don't know if XM and Sirius plan a reverse stock split after the merger. I don't know if there is a plan to flip the ratio around -- giving Sirius investors 0.2174 shares of XM instead -- in a zero-sum game that would find the company with fewer shares at a higher price.

In reality, it shouldn't matter. However, I have a theory as to what's keeping the shares in check now. If I'm right, it will mean good things later.

Silence is golden, for now
XM and Sirius have been lambs instead of lions over the past 14 months. They have let others do the bragging about the deal's merits because they still have regulators to appease. It just wouldn't be appropriate for them to be thumping their chests and flexing their pecs at a time when they are trying to convince the FCC that their union will be harmless to the competitive landscape.

So you have an industry that appears to be in limbo, when it's actually just trying to tiptoe past the border guard. The companies have scaled back on their marketing expenses. Even the typically confident Mel Karmazin has shown restraint in token conference appearances, leaning on third-party research in discussing synergies and emphasizing the merits of the deal from a consumer's perspective almost as much as from a shareholder's perspective.

It's the right approach. The FCC is still snoring at the checkpoint. XM and Sirius are right to take small, quiet steps. Once the FCC nods, Karmazin's approach will change. Financing hurdles will require a little less modesty. Then it will come time to win Mr. Market, where arrogance goes a long way to telling a good story stock.

So tiptoe gently, XM and Sirius shareholders. The party at the other side hasn't even gotten started yet.


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