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February 21, 2007

Thoughts on Sirius-XM Merger

There was a lot less discussion of the Sirius Satellite (SIRI) - XM Satellite (XMSR) merger announcement on Real Money, Street Insight andother business news sources than I expected. I suppose that is because it was a long rumored and well analyzed potential deal and analysts feel that the odds of FCC and Department of Justice approval are less than 50%.

Yesterday, SIRI rose 6% while XMSR gained 10%. Both stocks closed near their lows for the day, however, pulling back by 3-5% from daily highs reached close to the open.

I see a couple of relevant investment themes from the SIRI-XMSR deal.....

First, if the government approves the deal, it will have taken a step toward redefining the media landscape in the internet age. Approval will only occur if the companies can convince the government that satellite radio competes in a broader market including iPods, internet radio, HD radio and other new delivery systems for audio content. If the government says yes, a precedent will have been sent that should impact future acquisitions in the TV, radio, newspaper, cable, satellite, and entertainment industries. That would be bullish as it would encourage more acquisitions and merger which would support valuation multiples.

Second, approval of the deal will indicate the government is willing to let failing companies with self-inflicted wounds merge their way out of trouble. The failure here is mostly financial as 14 million subscribers is a pretty sizable business. I am not sure if investors could translate this "fail and merge" strategy to other deals but it is something worth watching on a deal-by-deal basis. Current merger discussions in the auto and airline industries would be the types of deals where a "fail and merge" precedent would have implications.

Third, as a media analyst, I am interested in whether a merger SIRI-XMSR will be a more formidable competitor to the traditional radio industry. The answer would have to be yes as placing all the content available on SIRI and XMSR today on a single service seems likely to attract some additional subscribers. However, I think that the slowing subscriber growth for satellite radio is a function of poor marketing. The message is muddled with potential subscribers not getting a clear message as to why satellite radio is superior. In particular, I think the lack of emphasis on how it is a superior music and talk radio service does not get through. Tell us why satellite is better than terrestrial -- no ads on music channels, more and better content suited to anyone's tastes, no loss of signal when traveling outside of city specific geographic areas. A merger alone won’t solve the poor marketing so I don’t think the near-term impact on traditional radio will mean much.

Finally, as a Sirius subscriber since 2003 I just hope that my favorite channel, JamOn 17, survives the merger. JamOn gets about 90% of my listening even though I have more than 100 channels to choose from. Of course, my son listens only to Jazz and Classical and my daughter listens only to indie rock. I guess our family represents the marketing message that I fell is missing.

Posted by Steve Birenberg at February 21, 2007 09:13 AM in Radio