Sirius (SIRI) And XM Satellite (XMSR): Let The Dead Bury The Dead

The Department of Justice has now cleared the deal for Sirius (NASDAQ: SIRI) to merge with XM Satellite Radio (NASDAQ: XMSR). The reaction was muted. Sirius stock rose to $3.15. It was nearly $8 in late 2005.

The trouble is that both companies are now zombies with balance sheets and operating incomes which threaten their long-term existence. The cost savings of combining the companies are questionable. The firms still run on two incompatible satellite platforms.Putting them together could take several quarters.

Another problems facing the companies is that their subscriber growth, which fueled their hot stock prices, has slowed. Customer growth at Sirius was 38% to 8.323 million at the end of 2007. Negative cash flow was $219 million. Debt service on the company’s long-term obligation of $1.3 billion will drag on the company’s results for years. 

In 2009, XMSR’s subscriber growth was only 19%. Revenue rose only 20% to $308 million in the fourth quarter and the company had a net loss of $239.

While the government fiddled, the market continued to pass satellite radio by. The number of multimedia phones which can play music increases by the millions each year. Apple (NADSAQ: AAPL) iPods can now be played though car audio systems. Handsets which can pick up local radio and TV stations are coming into the market.

Satellite radio was hot in 2004 and 2005. The market senses that not only is that behind the companies, but they cannot recover the ground lost. Sirius and XM have become niche players with dangerous balance sheets, especially in a market which hates debt.

Douglas A. McIntyre