[Satellite Today – 6-24-08] The proposed merger of Sirius Satellite Radio and XM Satellite Radio moved closer to reality when Kevin Martin, chairman of the U.S. Federal Communications Commission, signaled his support for the deal.
    The companies still have obstacles to overcome to complete the deal, which was announced in February 2007, and even if successful, investment bank analysts remain split on whether even a single satellite radio provider can survive in the competitive market it will face.
    Mark Wienkes, a media equity analyst at Goldman Sachs, said the combined company will have its work cut out. "Core demand for satellite radio appears to be falling amongst the younger demographics versus rapid increases for MP3 players," he said in a June 18 research note. "Also, core [average revenue per user] of both XM and Sirius has started to slide. Going forward, we assume the OEM (original equipment manufacturing) channel will drive nearly all of the net industry subscriber growth. This is important as the OEM subs generate less cash upfront versus a retail subscriber and require higher upfront cash outflows. … With ~50 percent of purchasers of new cars equipped with satellite radio not opting to pay for the service currently, and retail demand for the product very low, we see risk to long term subscriber estimates and question increased ARPU assumptions, even with a la carte.”
    While  demand for satellite radio services could be on the decline, the combined company may also face significant financing issues. “Given our belief that XM and Sirius may choose to raise $500 million to $1 billion in new capital as early as [the 2008 third quarter] and more likely by [the 2009 first quarter], in addition to the need to refinance at least $1.06 billion (and increasingly likely the whole $1.46 billion) in XM’s putable debt, we see a material risk of further equity dilution," said Wienkes. "Given the temperamental debt markets, declining forward estimates and contractual cash obligations as well as the size and cost of a potential capital raise, we see it unlikely that the industry can generate returns sufficient to justify the current valuation.”
    Tom Watts, a satellite equity analyst at Cowen and Co., put  a more positive spin on the merger. “Increased OEM installs will offset slowing car sales. The increased penetration of Chrysler and GM should generated higher [quarterly and yearly] OEM adds, more than offsetting any slowing in vehicle sales," he said in a June 20 research note. "XM is now at a 4 million add run-rate, up from 3.6 million last summer. This trend should continue. While we expect retail to be weak, retail is for only  about 5 percent of net adds. There are substantial synergies. We peg the potential valuation of synergies at $5 billion, the mid-point of the company’s $3 billion to $7 billion. Within the first 12 months, we expect $250 million in synergies by elimination of headquarters, sales and marketing expenses. This should move the company rapidly to [free cash flow] breakeven.”