Kicking Sirius While XM Is Down

Shares of XM Satellite Radio (Nasdaq: XMSR  ) and Sirius Satellite Radio (Nasdaq: SIRI  ) were trading as much as roughly 20% lower today, after Goldman Sachs analyst Mark Wienkes slashed his price targets on the satellite-radio operators.

Wienkes has cooled on the sector in recent months. He downgraded shares of XM back in December, rightfully pointing out that concessions and financing hurdles would have to be cleared even if the deal won regulatory approval.

Two months later, he was still bearish -- with sell ratings on both stocks -- yet suggested that approval delays make the deal more likely to go through. He was right again. The Department of Justice gave the deal its blessing a month later. The FCC is heading in that direction, with a few reasonable concession requests.

That brings us to this morning, where Wienkes is slapping on the bear fur thick. His six-month share-price target on Sirius is being cut from $2.25 to $1.75. XM is getting a bigger skinning, with his price target slashed to $6.50 from the previous $11.50 mark.

More than just hibernation
Wienkes has been a vocal bear in the analyst community, but the math behind the new price targets hints that a merger -- in his opinion, at least -- is not a foregone conclusion.

When XM and Sirius announced their "merger of equals" 16 months ago, terms stipulated that XM investors would receive 4.6 shares of Sirius for every share owned. In other words, if Sirius is worth $1.75 by the end of the year as Wienkes suggests, shouldn't the XM price target be 4.6 times that, or $8.05?

The final FCC decision could be completed in as little as three weeks. Financing won't be a cakewalk, but you have major sporting leagues, record companies, and automakers General Motors (NYSE: GM  ) and Ford (NYSE: F  ) relying on satellite radio for incremental revenue. They're not the most financially stable group of cheerleaders, but they're not going to let the deal fall apart.

In other words, the deal should close later this year. XM has always traded at a slight discount to the merger's exchange ratio -- a suggestion both of deal uncertainty and that XM needs the merger more than Sirius does -- but Wienkes' new price targets are grim.

As time goes by
There is collateral damage in regulatory oversight. How many people die as drugmakers go through several stages of clinical trials before the FDA approves a lifesaving cure? The flipside is that a lack of regulatory oversight also kills, going by the laundry list of recent lead paint-related toy recalls.

But if Wienkes is right, and XM and Sirius are worth substantially less in the coming months than they were when the merger deal was first announced, won't the blood be on regulators' hands?

Maybe not. Wienkes has been bearish for a long time. Just because he has been on the money in the past, that doesn't mean he'll always nail the future.

Wienkes is worried about the trends. The country's youths are turning to their portable MP3 players for aural consumption. Rate caps and new low-priced plans will eat into per-capita subscription revenue.

He's not exactly wrong, but he's not entirely right, either. Did you see Apple's (Nasdaq: AAPL  ) last quarterly report? Year-over-year iPod unit sales inched just 1% higher. Macs and iPhones are the new workhorses at Apple. 

I agree that there are way too many appliances out there competing for human ears these days. The future is not a slam dunk for the satellite-radio industry. The problem is that Wienkes assumes that a seemingly moribund XM and Sirius as standalone companies -- at least on the retail side -- will remain that way after the merger is completed.

Other analysts see billions in realized synergies, enough to turn problematic financial statements into healthy generators of cash flow.

I see two companies coming together as one, working on a unified marketing message and with market-widening value propositions for consumers. I see incremental revenue streams -- from online advertising to digital downloads to new sponsorship opportunities -- where XM and Sirius are barely scratching the surface.

I've been wrong about Wienkes being wrong before. I may be wrong again. However, I think he's biting off more than a bear can chew this time. He is treating tomorrow's Sirius-XM as if it were today's Sirius and XM.

Big mistake.

Apple is a current Motley Fool Stock Advisor recommendation. A free 30-day subscription is all yours.

Longtime Fool contributor Rick Munarriz subscribes to both XM and Sirius. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (16) | Recommend This Article (32)

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  • Report this Comment On June 19, 2008, at 5:50 PM, latebloomer100 wrote:

    I agree. He just does not understand the potential here especially when Mel is uncaged and goes back to working his majic. I see a future where satellite radio is all the rage and everyone has it either in their phone (that's right), car or on their person. This technology is the future delivery system of music, news, sports and a possible variety of other services we have not even imagined yet. Those SIRIUS satellites are quite the marvel and I don't think all their capability has been tapped yet. I also see SIRIUS trading at undreamed of highs but that is not coming overnight. This is going to be a moneymaker but you better be ready for the long haul.

  • Report this Comment On June 19, 2008, at 6:21 PM, latebloomer100 wrote:

    And I almost forgot. The retail market is moribund because most consumers are wise and know that there are going to be new receivers when the 2 providers merge. I want one receiver to get both services and I want it just like the XM receiver in my car now - integrated with my aftermarket receiver. I want it built by Pioneer and want one box to plug in and one antenna. I am probably not the only one who wants something like that. And when I'm done I want to get XM channel 12 and NASCAR. The rest of what is going to come out of the sky is gravy on the biscuit. Both services are strong on music content and I am waiting for the best of both worlds. That is why I am not removing a new receiver off of a hook at the local electronics emporium. Really, Mr.Wienkes, how did you arrive at your conclusion? Where did you get your data and how did you analyze it? Did you ask anybody if there were a bunch of folks like me waiting for the new gear? What do you guys call that? Pent up demand? It's not all numbers on a page. The market is alive with it's own energy and NO analyst in the world can nail it. And in my opinion you blew it big time.

  • Report this Comment On June 19, 2008, at 6:41 PM, Matt8265 wrote:

    Many thoughts on today's events.

    1. Most people thing GS is shorting the stocks and that this second downgrade is overdone, and unscrupulous. Too bad the SEC has no requirements of firms to disclose their holding on recommendations. This is just another brick in the wall of Wall Street Thievery where the SEC looks the other way. Go-along-get along with the SEC.

    2. The incompetent and impotent FCC under Martin (does not deserve a Chairman title) is fully responsible for this degrading of two fine companies.

    Once again, many think there is money changing hands between the NAB and Congress and the NAB and FCC. I hate to think this personally, but few things explain a 460 day delay sans incompetence, apathy, stupidity, or payola. You decide.

    In the end, it's ironic that the body (FCC)designed to help the average citizen and streamline technology, has professionally done the opposite without an apparent care.

    The FCC's actions are sickening.

    But who gives a rip?

  • Report this Comment On June 19, 2008, at 6:43 PM, Matt8265 wrote:

    Ooops... I forgot one.

    GS's worksheet failed to apply a dime to synergies. Save 1/2 your customer service.... Nah, it doesn't matter.

    They only looked at the top line growth.

    PS... maybe I wasn't clear prior. I HATE the FCC and will always disrespect this assembly under that lying arse Martin.... another "Brownie".

    Nice job "Brownie".

  • Report this Comment On June 19, 2008, at 6:55 PM, Matt8265 wrote:

    I think Mel is a genius for the ages in communications and marketing, but if he blows this merger, I will always wonder why he failed to energize his listeners in a tactfully done campaign. After all, the NAB is throwing both barrels at it and here we sit without a calling , organization or direction.

    Here's my answer since Mel doesn't seem to mind being "swiftboated" ...


    Sent to 55 of my friends and asked them to forward... you do the same eh?


    As you know I'm both a fan and investor in satellite radio... have been since inception of the technology.

    In February 2007, Sirius applied for a merger with XM radio as both of these entities have had tremendous start up costs and a very competitive market competing with ipod, wifi and others. The DOJ approve of this merger in March of 2008. Though the FCC has had this issue for a whopping 456 days, they have failed to rule. This is in part due to the influence that terrestrial radio ( NAB -National Association of Broadcasters) has gone to great length to block this both legally via exparte filings and underhandedly with "political contributions" to various members of Congress including Brownback, Dingle, Leahy, and a host of others hidden in the woodwork. The best Government money can buy as they say .....

    To top it all off, Jesse Jackson quickly joined "Georgetown Partners" and petitioned the FCC to "give" up to 20% of Sirius and XM spectrum to them for "minority broadcasting" which most consider a shake down. 8% has been suggested in a concession letter along with ala carte pricing and a 3 year price freeze.

    The FCC is in the final stages of determining if this merger will be allowed. If you have a moment, and support this merger, please click on the link above (see the far right of the FCC page for links) above and send an e-mail to Chairman Martin (who finally voiced support of this after 450 days) but mostly Commissioners Tate, Adlestein, McDowell and Copps. It being generally believed that Tate and Adlestein are the swing votes.

    Lastly, if you are so inclined, please forward this to 2-3 of your friends and ask them to support Satellite radio and forever wipe out the NAB monopoly and all those commercials.

  • Report this Comment On June 19, 2008, at 10:31 PM, itstimethesecond wrote:

    Its time to vote all of Congress out of office and get rid of special interest groups. That’s the power we have over these people and the special interest groups. There are more shareholders then these people. They have hart these two companies and all their shareholders for over 350days.

    Analyst like Mark Wienkes at Goldman Sachs are not necessary because we have 10k reports and we can make are decisions on the companies worth. They are paid market movers and should be investigated by the SEC.

    O ya voting for change is not vote for the two parties that have been controlling the country for all these years.

  • Report this Comment On June 20, 2008, at 9:43 AM, Matt8265 wrote:

    Have I mentioned how much I hate the FCC lately? ..well really, I like Adlestien and McDowell.

    Adlestien for the next Chairman!!! ... as he's not swayed by politics ( I don't think so anyhow... I'll let you know after this vote) and McDowell for not playing games or trying to leverage his position.

    Copps = Old School Dem. " GET OFF MY LAWN" Scowl.

    Tate = Trying to get reappointed.But has nice outfits!

    Martin = Finger in political wind for self serving interests. Puts public last. Love the Harry Potter look.

  • Report this Comment On June 20, 2008, at 10:35 AM, mitch1111 wrote:

    I seriously question the timing of Mr. Wienkes downgrade. What has so significantly changed over the past few months that GS comes out with this now, just prior to the FCC's OK of the deal? This really smells bad. If someone could explain why the same analyst opinion could not have been given a few months ago and what has changed since then, I'd appreciate it.

  • Report this Comment On June 20, 2008, at 1:17 PM, moefuzz wrote:

    Everyone said that recordable vhs/beta would kill the movie biz instead it just enhanced the revenue. I think Sirius on iPods and iPhones et al is inevitable. Remember when Wallmans had am/fm radio too???

    Also, the target demo at this point for iPod is skewed younger than the Satradio listener stuck in their car on a business trip or local commute. Sure there is overlap but not enough for one or the other to survive or fail based on the other's successs.

    Thanks Sachs, thank to you I just doubled my position on SIRI for a song.

  • Report this Comment On June 20, 2008, at 1:19 PM, moefuzz wrote:

    Oh and mitch1111....i bet Sachs clients are heavily shorted on SIRI and XMSR and this was the last shot before the merger to cash in.

  • Report this Comment On June 20, 2008, at 4:36 PM, mgv11 wrote:

    Couple of thoughts on the effect of the delays once the merger was announced. I couldn't agree more that a percentage of people have held off in making purchases waiting for the conclusion.... that is going way beyond anyone's expectations. Likewise, retail is not doing a good job of selling either companies products, best buy doesn't man the station nor do its ipod playing sales people know how to promote it. Give Sirius / XM some time together and they'll have a new strategy instead of simply beating each other up as in the past and now out waiting the DOJ and FCC. Ya, I think GS is getting away with piracy in their recomendations... now take the time to prove it with all the other problems in the industry and markets. Time will tell.

  • Report this Comment On June 20, 2008, at 11:41 PM, jprental wrote:

    i think goldman sachs is downgrading every stock it can because its real estate holdings are worse than this lieing low life outfit will admit to. and if they can short enough stocks and then come out with a bunch of lies to downgrade a stock its a no brainer they are selling as high as they are. to all of you goldman sachs people out there. got to hell

  • Report this Comment On June 23, 2008, at 4:58 PM, jamie4419 wrote:

    Jprental, I understand your anger.

    Alot of people don't know that the stock market is a very dangerous game. It is a game where the average investor has the odds stacked heavily against him.

    Be careful of the stock market. However, with lots of time, knowledge, and experience, one could do good. However, even then, one must be careful.

  • Report this Comment On June 24, 2008, at 5:44 PM, bramsey1234 wrote:

    Goldman is definitely munipulating this stock. Teens are tuned out because of $12.95 per month?? Are you kidding me. I also own Ipods and creating and updating a fresh library of new music can cost you hundreds of dollars at .99 cents a pop!!

    Satellite gives you immediate access to the whole library upfront. If Apple came up with the same concept to share their whole library, they would charge as much if not more considering royalties, etc...

    Get real Goldman and stop munipulating the stock for your own gain and your inner circle buddies.

  • Report this Comment On June 27, 2008, at 12:01 AM, McNabRanch wrote:

    I'd say GS really outdid themselves today. I bought more SIRI and shorted a share of GS, removed it from showing on my portfolio, and am quite likely to forget about it....memory gets weaker at 61...

    Needless to say, I don't think much of the tactics that seems to have earned them the reputation of being the smartest people on the street.

  • Report this Comment On July 05, 2008, at 4:31 PM, Matt8265 wrote:

    XM-Sirius Merger: Facts get lost by the shouting of the minority.

    There are 100 Senators and 435 Representatives

    in the House. A total of 535 elected Representatives of the people.

    Only 72 House members have opposed this verbally and/or in writing. Only 8 Senators Kerry, Leahy,Kohl,Cardin, McCaskill,Brownback, Dorgan and Snowe ) have opposed this merger.

    Of all Senators those in written and oral opposition represent only 8%. Of all House members those in written and oral opposition represent 15.8%. Of all Attorney Generals the 13 in opposition represent 26%.

    Looks to me like 85 % of Congress and 74% of States AG's are either neutral or receptive to the merger as they have had 502 days since the announcement to go on record, and have chosen not to.

    Please circulate this throughout the web and forward to the FCC members if you support this merger.

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