When it comes to satellites, television and radio go together like peanut butter and chocolate. They're both premium subscription services that broaden the entertainment options for those willing to pay up for more than limited ad-laden free programming. There is also likely to be some degree of overlap with their respective audiences.
The potential synergy between the two became crystal clear when Sirius XM Radio (NASDAQ:SIRI) cried for financial help last February. The two suitors to step up were EchoStar's (NASDAQ:SATS) Charles Ergen, with ties to DISH Network (NASDAQ:DISH), and Liberty Capital's (NASDAQ:LCAPA) John Malone, with his allegiances to DirecTV (NASDAQ:DTV).
Malone won out, and speculation has run rampant ever since on how satellite television and radio might come together in other cross-selling ways.
The latest observer to imagine more hookups is Barron's columnist Eric J. Savitz. Over the weekend, he whipped out his crystal ball and married off several companies in his Technology Week column. One of his predictions is that DirecTV will swallow Sirius XM.
That marriage would make sense in theory, but it's unlikely to happen for several reasons.
For starters, Liberty already has the best seats in the house when it comes to cashing in on Sirius XM's success. It received a preferred share stake in Sirius XM in exchange for its sugar-daddy assistance, convertible into a 40% stake in the satellite-radio operator. In other words, it already has a healthy position -- and a voting voice -- in Sirius XM.
We also have to consider a buyout price. Liberty's stake is convertible into nearly 2.6 billion shares, in addition to the 3.6 billion weighted average shares outstanding as of the end of the third quarter. With Friday's Sirius close of $0.60 a share, we're talking about a market cap of $3.7 billion. Tack on the roughly $3 billion in long-term debt, and we're now in the ballpark of $7 billion -- and that's before we add on a buyout multiple.
Sirius XM is rolling these days. It has defied skeptics, with its shares having popped fivefold in 2009. Do you really think CEO Mel Karmazin would cash out while the going is good without a meaty premium?
We have to talk valuation, too. Sirius XM is projected to essentially break even this year, as it grows its revenue by a forecasted 11%. DirecTV, meanwhile, is no slouch. It has been consistently profitable and is targeted to grow its top line by 9% this year. Buying Sirius XM would be dilutive to the bottom line, but in a deal valued at a minimum of $7 billion, it would also be highly dilute on a price-to-sales basis. Despite the logic and likely synergies, DirecTV shareholders may not go for that.
Finally, we have the regulatory noise to consider. If it took almost two years for Sirius and XM to hook up, imagine the hoops that the country's largest satellite-television operator will have to jump through if it wants to gobble up Sirius and XM. Getting to the nuptials could get messier than one might think.
The catch, of course, is that if Malone waits and Sirius XM continues its ascent through 2010, it will cost him that much more to snap up the 60% that Liberty does not own.
I still think that Savitz is way off base on this one.
Do you think DirecTV will buy Sirius XM? Share your thoughts in the comment box below.
