Sirius XM Satellite Radio Inc. (NASDAQ: SIRI) has reportedly gotten buyout overtures from DirecTV Group Inc. (NASDAQ: DTV) and EchoStar Corp. (NASDAQ: DISH). This sudden interest in an unprofitable company whose product has an uncertain future is a bit surprising.
Bloomberg News and other media outlets are reporting that DirecTV, the largest satellite TV provider, is in talks with Sirius about a deal. Meanwhile, EchoStar, which is controlled by media tycoon John Mallone, is snapping up Sirius debt. DirecTV is run by Charles Ergen. If these deals fail, the New York-based company is almost certain to file for Chapter 11 bankruptcy.
"Under one scenario, DirecTV could buy out shareholders and repay Sirius XM's debts, said one of the people, who declined to be identified because the talks aren't public," writes Bloomberg.
The pioneer in satellite radio has been circling the drain for a while. It had a net loss of $217 million, or 9 cents a share, during its fiscal third quarter even as its total subscribers rose 17 percent to 18.9 million. Churn, a measurement of how many people quit the service, was flat at 1.7 percent. Free cash flow fell to $97.59 million. The stock last traded at 5.89 cents, well below its 52-week high of $3.89.
So much for the merger benefits promised by Chief Executive Mel Karmazin. In November, he stunned investors by slashing his outlook for subscriber growth.
Satellite radio has failed to catch on for many reasons. Despite the initial hoopla surrounding the signing of big-name stars such as Howard Stern, the enthusiasm for the media died down considerably as sales of Apple Inc.'s (NASDAQ: AAPL) iPod soared. The industry also is overly dependent on new car sales, which have been plummeting for more than a year
"The ongoing success of the iPhone, even at this time of national austerity, is telling," writes radio analyst Sean Ross of Edison Media Research on his blog. "And some of the same listeners who think $13 a month is too much for satellite are willing to pay close to $100 a month for their iPhone service -- suggesting that if Sirius XM came with an app that let you read an MRI (or any of those other spiffy apps on in their TV commercials), it might be perceived as a better value!"
Despite all the excitement ,how combing Sirius with either DirecTV or Echostar will solve satellite radio's serious economic and technological problems elludes me.
Basics of Diversification
Learn one of the fundamental concepts of building a portfolio.View Course »