Everyone likes to play Cupid, and a Wall Street Playbook article on Seeking Alpha this morning argues that AT&T (T 1.10%) should pursue a match with Sirius XM Radio (SIRI 0.98%). Instead of spending $50 billion on widely reported plans to snap up DIRECTV (DTV.DL), why not spend just $25 billion for Sirius XM?
It's not going to happen.
For starters, unless Sirius XM's shares plunge sharply in the coming weeks and months it's going to take a lot more than $25 billion to take it over. It's not enough of a premium. Wall Street Playbook offers up Sirius XM's $19.4 billion market cap as a springboard for a buyout at $25 billion, but that ignores the satellite radio provider's substantial net debt position. Sirius XM's enterprise value is actually north of $22 billion, and that's before accounting for any of the additional shares and vested options that would kick in under a buyout scenario. Even if none of that existed, why would Sirius XM investors accept a 10% buyout premium to its $22.4 billion in enterprise value?
I know that the past few months have been disappointing for Sirius shareholders. The stock has shed 23% in value since peaking in October, and it's trading 8% lower year to date. However, is a 10% buyout premium really going to be enough for a stock that has been one of the market's biggest winners over the past five years? Sirius XM shares climbed more than 20% last year after soaring nearly 60% the year before. The company closed out its latest quarter with a record 25.8 million subscribers.
Liberty Media (FWONA) holds a controlling stake in Sirius XM. It calls the shots here. Liberty Chairman John Malone loves to trade assets, but he's not getting out of bed for anything short of $30 billion in this scenario. As long as the fundamentals don't start to crumble there's no pressing need to hand over the country's satellite radio monopoly for a pittance of a premium.
However, it's not just a matter of Sirius XM being too good for AT&T's theoretical $25 billion parachute. The deal also wouldn't make financial or strategic sense for AT&T. It may be gearing up to pay twice as much for the leading satellite television provider, but DIRECTV generated $5.2 billion in operating profit last year on $31.8 billion in revenue. Sirius XM clocked in with an operating profit of $1 billion on $3.8 billion in revenue. Paying twice as much for a company generating eight times the revenue and five times the operating profit isn't outlandish. Even if we turn to free cash flow, where Sirius XM's sweet scalable model really begins to narrow the valuation gap, DIRECTV is still generating nearly three times as much as Sirius.
Where would Sirius XM exactly fit in with AT&T? It may be a provider of premium satellite-based services, just like DIRECTV, but there's a big difference between video at home and audio in the car (and it's not just about pricing). DIRECTV offers to bundle its pay TV platform with Internet and telephone services, a market AT&T would love to corner.
It's also fair to say that antitrust regulators -- the same ones that AT&T and Sirius XM have already run into problems with in earlier corporate combinations -- would be very dubious here. At the very least it would cost Sirius XM shareholders' time, and that's not worth the hassle for a 10% premium.
Sirius XM doesn't need a buyout partner. It's better off on its own. AT&T doesn't need Sirius XM. It's better off with DIRECTV. A combination would be a lose-lose situation for both camps. Let them both win by remaining independent.
