Wednesday, May 02, 2007

WSJ: Merger Could Send Shares Surging

If Sirius-XM Happens ...
Merger Faces Long Odds,But a Deal Breakthrough Could Send Shares Surging
May 2, 2007; Page C12, Wall St Journal

There's good reason to suspect the merger between Sirius Satellite Radio and XM Satellite Radio Holdings is as good as dead. Both companies' licenses specifically forbid them from combining. Federal Communications Commission Chairman Kevin Martin and several senators have stated they are skeptical that the public would be well-served by a merger.
Management at each company remains optimistic that the merger will go through. But investors think otherwise, and have marked down both stocks.
This looks like an overreaction. Little about their businesses has changed since the merger announcement in mid-February. Yet both stocks are trading below their preannouncement levels. Sirius has lost 21% of its market capitalization and XM 17%. This decline means investors are being granted a free option on merger-related savings.
These are large. Administrative costs can be cut, research budgets can be slashed and costly wars over radio talent avoided. It would also create one large audience -- which is music to advertisers' ears. The cost savings would be about $1.3 billion a year, according to Lehman Brothers. Those savings will translate into higher earnings, and that income would boost the value of the companies to shareholders by about $10 billion, or about $2 billion more than the companies' combined market value now.
Of course, if regulators object, none of these savings will appear. But the market is already pricing in a zero percent chance of a merger going through. So failure shouldn't hurt much, if at all. On the other hand, an unexpected success would really send these stocks into orbit....read more: here

5/02/2007 05:05:00 AM

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