A Deeper Look At The CBS Rumor
April 17, 2007
One thing that today illustrated was how fast things can change for Sirius and XM. Clearly there is a lot of money exiting these equities early in the day, but just as clear is that there is a lot of money on the sidelines waiting to hop into Sirius or XM.
The CBS rumor now adds yet another series of thoughts surrounding the proposed Sirius and XM merger.
What if a company such as CBS wanted to get into this business?
Would there be a premium paid?
What becomes of the $175,000,000 break-up fee that is in the terms of the agreement?
Could a buyer swoop in and grab one of these companies while the proposed merger is happening?
Are these companies attractive to outsiders?
Why would a company see Sirius and XM attractive?
Which company is more attractive to an outsider?
Does the thought of a proposed bid by a terrestrial radio firm, or any firm for that matter, give a pause to the thought process of the DOJ? The FCC?
These are all questions that investors in this sector need to ask themselves. None of these questions have an exact answer, so investors typically find themselves trying to guess.
Sometimes taking a step back from the excitement provides enough answers for someone to make a better decision.
First, we should take a look at whether it is possible to even happen. The short answer is that yes, it could happen. There is however a break-up fee of $175,000,000 involved that the acquiring company would likely have to absorb. Does that make an outside deal cost prohibitive? Likely it doesn’t in my opinion. While the sum involved is substantial, the market cap of these companies has gone down by more than that amount since the merger was announced, and it represents about 20% of the proposed subscriber revenue for one of these companies in 2007. More simply stated think of it as the subscriber revenue for 1 quarter. That begins to put the value of the break-up fee into perspective.
If CBS were to express interest in acquiring satellite radio company “A”, they would approach that company’s board to negotiate. The board of Company “A” would then consider the CBS offer in comparison to the benefits of a merged satellite radio company, while also considering the likelihood for merger approval. There are many moving parts, but in the end, if CBS had a strong enough desire, a deal could happen.
Now, we need to consider what about these companies would be attractive to a company such as CBS? There are many things that could be attractive, but the biggest factor is “TOP LINE” growth. Sirius and XM have TOP LINE growth. Typically TOP LINE growth is required to see healthy BOTTOM LINE growth happen. A healthy blend of growth is most desirable.
Both TOP LINE and BOTTOM LINE growth are useful in determining the financial strength of a company, but they demonstrate differing aspects of a company. These types of growth are not interchangeable. BOTTOM LINE is more of a measure of how efficient a company is with its spending and operating costs and how effectively it has been controlling total costs. TOP LINE growth is an indicator of how effective a company is at generating sales and does not take into consideration operating efficiencies which could have a dramatic impact on the bottom line.
Terrestrial radio has started to become more stagnant at the TOP LINE. By contrast, satellite radio is a growing sector with the deals and structure in place to continue to grow on the TOP LINE. Terrestrial radio powerhouses have become very good cost cutters, and are effective at the BOTTOM LINE. This was necessitated by the influx of competition from satellite, internet, cell phones, and MP3 players. The existence of these competitors has made terrestrial radio powerhouses become more efficient.
Thus, in theory, you would be acquiring a medium for TOP LINE GROWTH while being able to maintain your BOTTOM LINE efficiencies. Such a deal could make great economic sense.
Now the tricky part comes into play. Which company is more attractive, or is getting both better? Likely, there would be the same issues that are being bandied about now if a company such as CBS were to try to acquire both. The path of least resistance is likely to go after one. Which is more attractive? Well, XM has a lower market cap, but the enterprise value is what comes into play. According to Yahoo, the EV of Sirius is 5.09 Billion, and XM is 4.79 Billion. Thus, XM is less expensive by $300,000,000. Now you need to consider brand awareness, content contracts, OEM contracts, current market share, future market share, debt load, cash on hand, cash flow, and many other items. In the end, a company such as CBS would have to weigh out all of these items to find the better value, and then tack on $175,000,000 and see if it is still a better value. Arguments of “attractiveness”’ can be made for each company. This piece is not about which is better, merely what the exercise would be to arrive at a potential decision. These are questions that investors who are considering a move in this sector should ask themselves to determine the proper play, or whether or not a play even exists.
One logical question is if you have terrestrial stations, why buy a satellite radio company. The answer is simple yet complex. Think about the ability to deploy sample satellite content on HD radio. Think about the ability to advertise a premium subscription based product on free radio. Think about the ability to broaden the footprint of terrestrial shows via satellite. Think of the ability to advertise on both platforms. Think of the ability to appeal to any consumer, rather than specific niches and price points. There are many reasons a terrestrial radio company would want to get into the satellite business.
Simply stated, an already perplexing situation has had a new element added. That element could come into play at any time, and investors need to be cognoscente of this. The popular belief prior to today was that there would be little action aside from the arbitrage spread with Sirius and XM until the DOJ and FCC are close to a decision (something most people feel is months away). With this new information, investors now have new items to consider.
The point of this piece is not to propagate the rumor of today, but rather to get you the investor to think more deeply into the issues at hand as you consider your investment decisions. Sometimes that requires us to step back and observe an issue from another angle. Looking at the possibilities is free. Not knowing about them can cost you. Stay informed, and think about things like this from all sides.
Labels: buyout, cbs radio, sirius, xm
4/17/2007 10:58:00 PM
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Imus Suspended From Terrestrial Radio
April 9, 2007
Terrestrial radio talk show host Don Imus has a two week suspension on his hands for comments made on his show. Imus has many times stated his loyalty and respect for Sirius' Mel Karmazin, and the latest scandal has had some wondering if a move to satellite is in Imus' future. Likely, CBS Radio will hold onto Imus for the duration of his current contract, if for no other reason than to keep him off of the market from others.
AP STORY EXCERPT:
CBS Radio, MSNBC say they will suspend Imus for two weeks after inappropriate comment
By DAVID BAUDER, AP Television Writer
April 9, 2007
NEW YORK (AP) -- CBS Radio and MSNBC both said Monday they were suspending Don Imus' morning talk show for two weeks as a protest grew about his reference last week to members of the Rutgers women's basketball team as "nappy-headed hos."
The suspension begins next Monday.
MSNBC, which telecasts the radio show, said Imus' expressions of regret and embarrassment, coupled with his stated dedication to changing the show's discourse, made it believe suspension was the appropriate response.
"Our future relationship with Imus is contingent on his ability to live up to his word," the network said.
Imus, who has made a career of cranky insults in the morning, was fighting for his job following the joke that by his own admission went "way too far." He continued to apologize Monday, both on his show and on a syndicated radio program hosted by the Rev. Al Sharpton, who is among several black leaders demanding his ouster.
Imus could be in real danger if the outcry causes advertisers to shy away from him, said Tom Taylor, editor of the trade publication Inside Radio. The National Organization for Women is also seeking Imus' ouster.
"Everyone is on tenterhooks waiting to see whether it grows and whether the protest gets picked up more broadly," Taylor said.
Imus isn't the most popular radio talk-show host -- the trade publication Talkers ranks him the 14th most influential -- but his audience is heavy on the political and media elite that advertisers pay a premium to reach. Authors, journalists and politicians are frequent guests -- and targets for insults.
He has urged critics to recognize that his show is a comedy that spreads insults broadly. Imus or his cast have called Colin Powell a "sniffling weasel," New Mexico Gov. Bill Richardson a "fat sissy" and referred to Sen. Ben Nighthorse Campbell of Colorado, an American Indian, as "the guy from `F Troop."' He and his colleagues also called the New York Knicks a group of "chest-thumping pimps."
On Sharpton's program Monday, Imus said that "our agenda is to be funny and sometimes we go too far. And this time we went way too far."
Imus made his remark the day after the Rutgers team, which includes eight black women, lost the NCAA women's championship game to Tennessee. He was speaking with producer Bernard McGuirk and said "that's some rough girls from Rutgers. Man, they got tattoos ..."
"Some hardcore hos," McGuirk said.
"That's some nappy-headed hos there, I'm going to tell you that," Imus said.
The Rutgers comment has struck a chord, in part, because it was aimed at a group of young women at the pinnacle of athletic success. It also came in a different public atmosphere following the Michael Richards and Mel Gibson incidents, said Eric Deggans, columnist for the St. Petersburg Times and chairman of the media monitoring committee of the National Association of Black Journalists. The NABJ's governing board, which doesn't include Deggans, wants Imus canned.
"This may be the first time where he's done something like this in the YouTube era," Deggans said. Viewers can quickly see clips of Imus' remarks, not allowing him to redefine their context, he said.
On his show Monday, Imus called himself "a good person" who made a bad mistake.
Labels: cbs radio, imus, suspension
4/09/2007 09:13:00 PM
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NY Post Reports Hollander Leaving CBS Radio
March 16, 2007
March 16, 2007 -- CBS Radio Chairman and CEO Joel Hollander is quietly laying the groundwork to step down before his contract expires at year's end after a discordant relationship with CBS boss Les Moonves, according to several sources familiar with the matter.
Hollander, whose contract expires on Dec. 31, is said to be tired of the continual battles with Moonves over the radio unit's direction.
"Hollander's a radio guy, and CBS doesn't understand radio nor do they like radio," said one source familiar with the tussle.......
Read More HERE via NY Post Labels: cbs radio, hollander
3/16/2007 10:20:00 AM
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