Back when Sirius Satellite Radio (NASDAQ:SIRI) and XM Satellite Radio (NASDAQ:XMSR) first got their licenses, there was a key stipulation to their government-blessed duopoly. That stipulation was simple: No merging. The companies had to compete against one another to assure that consumers had choice.
And compete they did. So fiercely, in fact, that they both basically destroyed any chance either had of operating profitably as long as the other one was around. That left two real options:
- Fight until the bitter, bankrupt end of one or the other.
- Merge, in direct contravention of the rules allowing both companies to exist.
Taking a cue from the "it's easier to ask for forgiveness than for permission" school of thought, the two are pinning their hopes on a merger. Given that the government just put the kibosh on Whole Foods' (NASDAQ:WFMI) planned merger with Wild Oats (NASDAQ:OATS), what possible chance does this one have? I'd wager somewhere between "slim" and "none."
History repeats itself
Of course, under American bankruptcy rules, one dominant firm is rarely able to drive its only direct competition out of business. Regardless of who starts it, what'll most likely happen is that the weaker of the two will likely go bankrupt first. Then, under that shroud of bankruptcy protection, that company will shed its debt and renegotiate the expensive contracts that got it in trouble in the first place. Finally, it'll emerge from bankruptcy, far stronger than before. Once free from the burdens that knocked it into bankruptcy, that formerly weaker competitor will deliver the fatal blow that knocks the other one into bankruptcy protection. And so the cycle would begin, again.
This sort of thing happens all the time with airlines. Delta (NYSE:DAL) and Northwest (NYSE:NWA) recently re-emerged from bankruptcy stronger than they were when they entered it. Prior to them, both United (NASDAQ:UAUA) and Continental took their turns under court supervision. No matter how you look at it, things don't look good for the shareholders of either Sirius or XM. The parallels between satellite radio and the airlines are just too eerie to ignore.
Things fall apart
Lest you think this talk of potential bankruptcy is mere speculation, take a gander at data from Sirius' own annual report:
|
Year |
Revenue |
Operating Income |
Long-Term Debt |
Shares Outstanding |
|---|---|---|---|---|
|
2002 |
$805,000 |
($313,127,000) |
$670,357,000 |
76,394,000 |
|
2003 |
$12,872,000 |
($437,530,000) |
$194,803,000 |
827,186,000 |
|
2004 |
$66,854,000 |
($678,304,000) |
$656,274,000 |
1,238,585,000 |
|
2005 |
$242,245,000 |
($829,140,000) |
$1,084,437,000 |
1,325,739,000 |
|
2006 |
$637,245,000 |
($1,067,724,000) |
$1,068,249,000 |
1,402,619,000 |
And let's not forget this little gem from that same report:
Our business might never become profitable. As of December 31, 2006, we had an accumulated deficit of approximately $3.8 billion. We expect our cumulative net losses to grow as we make payments under various contracts, incur marketing and subscriber acquisition costs and make interest payments on our debt. If we are unable ultimately to generate sufficient revenues to become profitable, we could default on our commitments and may have to discontinue operations or seek a purchaser for our business or assets.
About the only things rising faster than Sirius' revenues are its costs of doing business. Unfortunately, there are really only two ways to finance money-losing operations: issuing debt or issuing shares. As you can tell from the chart, Sirius has done and continues to do both, which dramatically dilutes existing owners. Unless its business miraculously becomes rapidly profitable, you can expect more of the same, until bond and stock owners cease being willing to finance its cash-hungry business.
Better use of your money
Sure -- I'll grant that there's a chance that Sirius could survive without bankruptcy, especially if the merger with XM is approved. But even if it does survive, what could it possibly be really worth? The market values it at around $4.2 billion. That's pretty steep for a company that took in a mere $637 million in revenue and lost more than $1 billion doing it. Other than the remote hope of a miracle merger approval, I simply don't see what's supporting Sirius' shares these days.
If you're looking for a tax write-off, there are far better ways to get one than risking your cash in a money-losing speculative investment.
The duel's not done yet! Go back and read the other arguments, then sound off in Motley Fool CAPS and vote for the winner.
Whole Foods is a Motley Fool Stock Advisor recommendation. To see what other great stocks the newsletter has picked, take a free 30-day trial today.
At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. The Fool has a disclosure policy.
