Satellite Radio's Last Independence Day

• Email
• Share
• Print

Whether you're manning the grill, waving a flag during a patriotic parade, or launching bottle rockets over the Fourth of July holiday weekend, it's easy to forget the little things. You know, like reflecting on the likelihood that this will be the final holiday of independence for XM Satellite Radio (Nasdaq: XMSR) and Sirius Satellite Radio (Nasdaq: SIRI).

I'm not suggesting that the independence is over, just because Federal Communications Commission Chairman Kevin Martin gave the deal his blessing last month, with a committee decision likely later this month.

In fact, many things -- many unfortunate things -- could happen between now and the next time we're flipping over the Independence Day burgers.

• The FCC could approve the deal, yet Sirius and XM could blow it on the financing end.
• The FCC could kill the deal, with one of the companies buckling under in a sea of dire auto sales.
• The FCC could continue to delay its verdict, until one of the providers files for bankruptcy protection.

In short, enthusiasm for the Sirius-XM deal has lasted about as long as a penny-store sparkler. A share of Sirius will run you less than a pair of dollar-menu sandwiches. XM's stock, meanwhile, costs about what you'd pay to get you into the matinee, with all the same wild ups and downs as an action flick.

Goldman Sachs analyst Mark Wienkes seemed overly bearish when he issued price targets of $1.75 on Sirius and $6.50 on XM. Now he's a bad trading day or two away from shouting, "Bingo!"

Hope, revisited
The share weakness has come despite Sirius' announcement this week of some pretty uplifting guidance. If the deal with XM closes in the next few months -- an uncertainty, of course -- Sirius believes that the combined company will generate net cost synergies of $400 million in 2009.

Some analysts may have had more ambitious targets, but the end result is that Sirius-XM should generate positive cash flow next year before satellite capital expenditures, or the adjusted EBITDA of $300 million.

Sirius is blunt about its challenges. It points out that closing the deal will result in higher interest expenses on the XM debt that it must refinance. The company will also have to replace debt that comes due next year, again at higher rates, given the iffy economy and the nervous state of creditors.

The deal is still worth the trouble, of course. Besides, there's no turning back at this point. Musical licensing costs are scaling higher. New-auto sales -- the lifeblood of satellite radio since retail sales have stalled -- are sluggish as big-ticket items suffer across the board. We're also driving less as a result of higher gasoline prices, which are eating away at the value proposition of paying $13 a month for satellite radio.

The scenario is ugly, but it's not of the doomsday variety. Keep in mind that many of these shortcomings will correct themselves. If Sirius-XM turns cash flow-positive, as expected, creditors won't be as nervous in extending maturities at reasonable rates next year. Higher gas prices may lead consumers to replace their older cars that don't have satellite receivers with more fuel-efficient hybrids that do. Even something as problematic as the value proposition will find an elixir once Sirius-XM rolls out half-priced a la carte plans next year.

Red, white, and black and blue
Satellite radio, unlike satellite television, has truly been a stateside phenomenon. WorldSpace (Nasdaq: WRSP) has sputtered in overseas markets. That doesn't mean XM and Sirius are doomed. It just means the burden is greater on them as pioneers.

Things won't get any easier for them, either. Speedier 3G phone networks will make portable music streaming easier and further level the playing field that Sirius and XM expended billions of dollars on to tilt in their direction. XM and Sirius have Web streaming in their bag of tricks, but it's easier to compete against terrestrial radio on the dashboard dial than it is to butt heads against music-subscription services such as Napster (Nasdaq: NAPS) and RealNetworks' (Nasdaq: RNWK) Rhapsody, or Apple (Nasdaq: AAPL) and its Internet-beamed content.

I refuse to turn bearish. The future will be choppy and prickly, but it's hard to fathom that Sirius-XM will be worth less than the component companies are today, if Sirius is even remotely on target with its 2009 guidance.

Light that cherry bomb, Mel Karmazin. Just make sure you're pointing it the right way when it goes off.

Other recent stories on XM's long courtship with Sirius:

• What Now, Satellite Radio?
• Before XM Kisses Sirius
• Satellite Radio Hands Out Appetizers