Wednesday, July 2, 2008

Sirius predicts post-merger strength

Responding to an unfavorable analyst outlook for post-merger Sirius and XM, satellite radio network Sirius this week published its guidance for 2009, predicting a full year of profitability if the merger is completed.

Just under two weeks ago, Goldman Sachs analyst Mark Wienkes wrote, "While the FCC draft circulation signaling the merger's likely ultimate conditioned approval generated a short-term lift to the stocks, we think any imminent merger-related strength has passed." He went on to add, "With core demand for satellite radio falling amongst the younger demographics, versus rapid increases for MP3 players and other new technologies, and declining core ARPU, we see long-term risk to the outlook."

Subsequently, shares in both XM and Sirius fell dramatically under selling pressure.

On Monday, however, Sirius posted its earnings forecast, anticipating a strong beginning for the combined company, assuming the merger gets approved. Currently unresolved, Sirius and XM have the joint honor of being the subject of the longest merger review in history. This is thanks in large part to opposition from lobbying groups and related legislators. Earlier this week, a group of democratic senators petitioned the FCC to enforce stricter policies regarding Sirius and XM interoperable radios, an issue which opposition has sedulously pushed.

Though no developments in interoperable radios were specifically mentioned, Sirius' CEO Mel Karmazin announced that if the merger takes place in the third quarter of this year, Sirius and XM together can expect positive cash flow for the entirety of 2009, something neither company has done individually.

Karmazin will be the CEO of the combined entity, of which Sirius will be the parent and XM the subsidiary. Net synergies -- or the increase in revenue and reduction in costs due to the merger -- have been projected at a total of $400 million. Similarly, adjusted 2009 earnings (EBITDA) are expected to be in the neighborhood of $300 million.

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