Why the 3 Candidates to Buy SiriusXM Won't
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, there has been a lot of speculation as to whether SiriusXM (NASDAQ: SIRI) is a takeover target. While this type of conversation is not entirely off base, the potential buyers that are mentioned among some comentators do not seem like the most likely suitors. First, let’s examine the target.
SiriusXM is currently trading around $2.10, with a 52 week range of $1.27 - $2.44. It has a market capitalization of close to $8 billion. SiriusXM added 334,000 net new subscribers in the third quarter, with 440,000 projected for the fourth quarter. This will bring total subscribers close to 22 million.
It currently enjoys an exceptionally high new-vehicle penetration rate. Roughly two-thirds of all new cars sold in the U.S. come with a radio capable of supporting Sirius or XM. These new cars also come with a three month prepaid subscription to SiriusXM. If it can maintain its conversion rate anywhere near the current level of 44% (it's hovered in the 44% - 48% range for the past 12 quarters), its revenue projections for the foreseeable future will remain strong. Its strong subscriber base, ability to retain these customers, and strong growth forecasts due to the high penetration rate makes this company an attractive target.
Now, let’s review the three most mentioned companies with regards to a takeover.
DirecTV (NASDAQ: DTV) is trading around $43, with a 52 week range of $39.82 - $53.40. DirecTV has shown strong subscription growth in the U.S. and Latin America. This can be attributed to an aggressive promotional plan of its NFL Sunday Ticket, which it offered for free with a two year commitment to video service. It has $1,297 million in cash and cash equivalents, with $13,463 million of outstanding debt. Its churn rate for average monthly subscribers is 1.62%, but that figures to be put to the test as DirecTV has notified its subscribers of its intention to raise rates in February.
In addition to raising costs, DirecTV faces intense competition from rivals such as DISH Network (DISH) and Verizon (VZ), as well as other internet video streaming companies. Many can argue that DirecTV would love to diversify via an acquisition of SiriusXM. It has introduced its automobile ready version of its satellite and has targeted the rental car industry to roll it out. SiriusXM’s high new-car penetration rate might seem like a good fit for this product, but the equipment for DirecTV Auto is still much too expensive for this to be a viable solution. At this point, it seems less than likely that DirecTV would give serious thought to a larger acquisition; perhaps some smaller ones might be on the horizon. However any DirecTV-SiriusXM marriage seems unlikely.
Liberty Media Corp (NASDAQ: STRZA) is currently trading at $82.87, with a 52 week range of $58.51 - $104.34. It has a market capitalization of $6.5 billion. More importantly, it owns a 40% stake in SiriusXM already. This has led to months of speculation that Liberty Media would engage in such a maneuver.
There are obvious revenue synergies in this deal, and this will significantly improve Liberty Media’s long term cash flow. If you are as bullish on satellite radio as Liberty Media is, then you would be inclined to make this move. The problem? Liberty Media doesn’t seem to have any plans to move forward. It comes down to an issue of whether gaining control is worth the extra money. If you feel the management is doing an adequate job and you have a board presence, why would you risk potentially disrupting a company that you already own 40% of?
Pandora (NYSE: P) is currently trading at $13.22 with a 52 week range of $9.33 - $26.00. It has a market cap of just over $2 billion, having gone public in mid-2011. This is one that has gotten some press; however, it has proven baseless. First and foremost, would it make sense for a company like Pandora to marry with SiriusXM? Of course, it would. Pandora would enjoy being able to leverage the 22 million or so subscribers that SiriusXM can bring to the table. Compound that with the fact that SiriusXM has a 67% new-car penetration rate. Now look at the diversified content that SiriusXM has in comparison to Pandora. Another positive, Pandora has no debt.
The problem? Pandora has $90 million of cash and cash equivalents; and it would never be able to structure a deal to pull this off. Again, would it be a smart, strategic move for Pandora, sure; could it be done, not likely. A strategic partnership may be a better option.
Sirius' best bet is to stay on its own. While larger operators like Liberty Media (as others have speculated) could hugely benefit from this unique company's future earnings prospects, the company needs time, rather than more cash. Sirius is not a company for traders looking for a quick gain, but rather a long-term bet on subscription-based radio as a viable investment.
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