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Sirius Hearts XM?

By Rick Munarriz – Updated Nov 15, 2016 at 6:17PM

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XM and Sirius may fit well together, but a merger is unlikely.

Speaking at the Convergence 2.0 Conference in New York yesterday, Sirius (NASDAQ:SIRI) CEO Mel Karmazin had a different type of convergence in mind when he spoke of rival XM Satellite Radio (NASDAQ:XMSR).

"Regarding XM -- would we like to buy them? Sure," he said, before discounting his own words by bringing up the likelihood of the FTC squashing the deal even if the two companies were to agree on terms of a union.

Sirius and XM are a duopoly in satellite radio, and the government is just not going to let them team up to form a monopoly. Four years ago, those same regulators didn't let DirecTV (NYSE:DTV) and EchoStar (NASDAQ:DISH) merge, and that's with established cable service providers competing with similar offerings to the two satellite television services. XM and Sirius are pretty much on their own island when it comes to premium digital radio offerings.

This doesn't mean that Sirius and XM will remain independent forever. It's just that a merger is likely to involve a larger media player. DirecTV and Dish parent EchoStar are possible suitors. And they already have alliances; DirecTV offers XM music channels on its service and EchoStar features Sirius audio streams.

News Corp. (NYSE:NWS) is another potential nibbler. It owns a stake in DirecTV, so it's already in tune with XM, and is a major player in satellite entertainment overseas through Sky in Europe.

DirecTV, EchoStar, and News Corp. would have plenty to gain by gobbling up one of the two fast-growing satellite radio upstarts, and that alone may persuade more conventional media conglomerates like Comcast (NASDAQ:CMCSA) or Time Warner (NASDAQ:TWX) to hold up their bidding cards.

If it does happen, it's likely to happen sooner rather than later. If XM and Sirius hit their mark and start producing positive operating cash flow in a few quarters, a lot of the bearish sentiment that has been marinating the stocks in recent months will evaporate. Prices will start inching higher, creating less of an incentive for XM and Sirius to cash out, and the potential acquirers may not be willing to pay those higher prices.

Wedding bells may happen. Just don't expect it to be XM and Sirius walking down the altar holding hands. They would never get through that pesky "is there anyone here today that has reason to believe that these two should not be wed" part.

Rick recommended XM to Rule Breakers subscribers last year. Though the stock currently in the red, the average newsletter pick is soundly beating the market. Time Warner is a Stock Advisor selection.

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

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Stocks Mentioned

Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
SIRI
$5.81 (-1.02%) $0.06
Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$31.84 (-1.94%) $0.63
DISH Network Corporation Stock Quote
DISH Network Corporation
DISH
$15.20 (-3.00%) $0.47
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.
FOX
DIRECTV, LLC Stock Quote
DIRECTV, LLC
DTV.DL
XM Satellite Radio Holdings Inc. Stock Quote
XM Satellite Radio Holdings Inc.
XMSR.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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