Not many analyst groups can say that they both predicted that the Sirius XM merger would go through, from the very first day that it was announced, which Faultline can, but we can also say that we never wavered in that belief and the fact that the FCC has finally, after almost two years of wrangling passed the deal, is testimony to the small size of the deal compared with say an AT&T SBC merger.
Had it been a bigger company, with lobbyists in favor of the deal, instead of the ranks of existing media lobbying against it, this deal would have been given higher priority and rushed through. Investors are now faced with the two merged companies currently worth roughly half what they were worth the day the deal was announced and the prospect of shares continuing to go down as both companies re-arrange debt and equity offerings to ensure they have enough money to execute the merger, survive a recession and find a way forward.
In the end it was not deemed necessary to curry favor with one of the two dissenting FCC Commissioners in order for the deal to go through and instead the Republican Deborah Taylor Tate felt okay voting it through once the two companies had agreed to settle charges relating to violating FCC interference rules, extracting a payment of $19.7 million for violations relating to radio receivers and ground-based signal repeaters.
Let’s face it the deal involves two companies that would never have made it on their own, and who’s body blows to one another in an effort to survive would have killed off one if not both.
Today Sirius ‘ the surviving name ‘ has almost a clean sheet in deciding how to take on the rest of US radio, with the exception of the consent decree and promises it has made with the FCC in order to parlay the deal.
Both agreed to implement voluntary commitments to a la carte programming, minority and public interest programming, equipment, geographic service and a three-year price freeze on subscription rates and have also settled all outstanding disagreements with the Enforcement Bureau of the FCC.
Some radios that include an extra FM transmitter, along with some terrestrial repeaters, will be replaced or switched off. XM has around 100 such terrestrial repeaters that contravene FCC regulations, and half will be shut down and the other half fixed or shut down.
Sirius will get permission to switch back on some of the handful of terrestrial repeaters it shut off in October 2006, and the rest will remain shuttered.
One of the major changes to their business will be making receiver specs available to outside suppliers which they will do ‘immediately,’ and they will deliver interoperable radios within nine months.
One of the major consumer complaints about Sirius and XM is that customers had a hard time choosing between them. Surveys taken during the past week on various web sites, indicate that many more people will consider taking a combined subscription once there is a device for it.
One of the issues were the different sports that were catered to with exclusives by each of the two operations, rights they had paid huge fees for, but so often customers that like the music channels of one, had their favorite sport covered on the other ‘ once that is put right, subscriptions will become easier again.
Once the services are re-jigged to better reflect a single merged operation, and once content deals, where possible, can be renegotiated and other costs cut, Sirius will be a far more attractive investment, but today investors are running for the hills and the next two quarters will be tough on the merged firm.
The deal means the creation of a company with over 17 million customers with annualized revenues of over $2 billion, and debts considerably larger than its annual revenues. Earlier this week Sirius put through a $375 million stock offering to bolster cash holdings and it announced quarterly results where the loss from operations is down to $24 million, compared to $79 million last year. Despite these results the shares continue to fall, dropping over 16% on the day, to leave it with a market capitalization of just $2.8 billion, while XM is now valued at just $2.6 billon, presumably making the merged entity around $5.4 billion when paperwork is complete.
During an approaching US recession new customers will be hard to win over, and the company must focus on not letting churn run out of control, and look for cost cuts over customer acquisition, to ride out the recession. Or the first sign of churn rising could send the combined price down even further.