Time for Sirius selling?

Posted Feb 20th 2007 9:56AM by Peter Cohan
Filed under: Major Movement, Deals, Industry, XM Satellite Radio (XMSR), Sirius Satellite Radio (SIRI)

There are many holders of Sirius Satellite Radio, Inc. (NASDAQ: SIRI) stock wondering whether to sell or hold. To answer that question, each holder should conduct research or seek advice from a qualified professional. What are the terms of the deal for SIRI holders? What's the financial profile of the combined company? What should you do if you bought your shares at a price lower than $3.70? What if you bought your shares at a price higher than $3.70?

SIRI is buying XM Satellite Radio Holdings, Inc. (NASDAQ: XMSR) for $4.6 billion in SIRI stock. If you hold 5,000 shares of XMSR shares, you will receive 23,000 shares of SIRI. If you are a SIRI shareholder, there will be a lot more SIRI shares over which to divide the losses of the two companies. Many investors' shares are underwater. XMSR closed at $13.98 last Friday, down 42% from its 52-week high of $24.21 last April. Meanwhile SIRI is 34% below its $5.57 high of last April.

As I posted yesterday, the combination of SIRI and XMSR yields a company with $1.4 billion in revenue and $1.9 billion in losses. It gets even worse when you look at the balance sheet. Combined, the companies would have $2.44 billion in debt, on a negative net worth of $1,085 million with cash of $640 million. At a combined quarterly cash burn rate of $363 million in the quarter ending 9/30/06, these companies could simply run out of money if they can't cut the hoped for $7 billion in costs. That's why it makes a big difference whether the regulatory approval occurs by the end of 2007 or in 15 months.

I question whether costs will be cut enough. SIRI will be in control of the combined company since it will own 53% of the shares to XMSR's 47%. With SIRI's CEO taking over the combined company, I anticipate that SIRI's free-spending culture will prevail over XMSR's more frugal one. According to USA Today, XMSR prides itself on its frugality, building its headquarters in a transitional neighborhood in Washington. Sirius spent freely on talent and built a lavish, high-tech studio in Rockefeller Center. 47% of SIRI's revenue goes to programming and marketing expenses, much higher than XMSR's 34%.

If I held SIRI shares and had bought them below $3.70, I would see good news. SIRI is up about nearly 8% at the start of the trading session. In my view, there are significant regulatory problems that could derail this deal. If the deal falls apart, SIRI stock will tumble. Therefore, I would use this price spike as an opportunity to sell at a profit. If I owned SIRI at above $3.70, I would take my losses and move on.

You can continue to enjoy satellite radio services without losing sleep and/or money on this volatile stock. What do you think?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in SIRI or XMSR.

Tags: siri, xmsr

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Reader Comments (Page 1 of 1)

2-20-2007 @ 10:19AM

Lerone Williams said...

Tumble? Tumble to what exactly? They wont tumble they'll just be stuck around 3.00 until the dummies in the market realize that siri and xm are two different companies and that siri has the better buisness model.

2-20-2007 @ 11:04AM

Stan said...

Lerone - Agreed. Read the NY Time article this morning: SIRI is Buying XMSR Am I missing something? However there's still the 600 pound gorilla in the corner....MONOPOLY. I don't think this will happen.

2-20-2007 @ 12:07PM

Michael said...

My question is: how did the folks who are running SIRIUS not see the lack of interest in their product in the general public? After all who wants to pay to listen to radio???

2-20-2007 @ 12:09PM

steve said...

Did the "Gorilla" lose weight? Since the FCC is going to be faced with "justifying" this merger as less than a Monoploly, this merger is headed for a rough road. The "Gorilla" weighed in the last time this merger was announced a couple months ago. This being a merger of two companies in one market..Monoply. I just need (SIRI) to climb above 4.50 and I'll be happy to dump em.

2-20-2007 @ 12:26PM

Gill said...

Who wants to pay for commercial free radio? Me! Who loves to listen to Stern and will pay $13/month to do it? me!

2-20-2007 @ 12:39PM

John said...

I loved the concept when I first heard about commercial free radio in 97 and have been buying stock in SIRI ever since. I reme,ber back in the 70's when the same people said, who who want to buy cable TV when TV is free? How many of these same people have free TV today. It also took cable TV 10 years to start making money so hand in there, better days are not that far away. John

2-21-2007 @ 1:21PM

Sheldon L said...

Peter is giving you all good advice - enjoy the radio - invest in something else.

2-21-2007 @ 2:37PM

Annie said...

John, I totally agree w/ you! I buy a stock when I feel a company has potential and I love the concept of satellite radio. I also own a vacation home in the country and as far as commercials????....I can barely get any radio stations! I'm holding my SIRI stock!

2-21-2007 @ 5:29PM

DDon said...

if it would only work out, I am here holding XMSR and SIRI that have jumped off the diving board in value and will not recoop until siri hits $11/share...as daddy often said, Wish in one hand and ++it in the other and you know which one gets filled first. I have taken a woopin on these two and the thought is to bail before the ice freezes over and there is nothing left to sell....I use my ipod in the car now and get all the music I love and want. Satellite radio was a good idea that has been elipsed. Howard and Mel have sucked out all the value..bye bye

2-21-2007 @ 5:49PM

Michele Diona said...

What's interesting and capturing to me is the growth rate of satellite radio, it exceeds the rate of all tech devices up to date such as cell phones and cable T.V. The start up costs to launch a business of this sort speak for themselves and I never expected to triple my investment overnight therefore hold on and let Mel show you the way after all his track record is flawless in the media world.