Once again, rumors of a competing takeover bid for XM Satellite Radio have surfaced, and the result was a spike in share price, and a large move in call options.

With this rumor in mind, we thought it would be a good idea to review the proposed deal between Sirius and XM, and how an outside party may effect the deal with a takeover of their own.

The Sirius/XM deal is a stock only transaction. If approved, each XM share will receive 4.6 shares of Sirius. Thus, the deal does not have a set dollar figure on it. The value of the “buyout” is determined by the price of Sirius shares, as they are the “currency” of the deal.

An outside competitor could indeed make an offer for one of these companies. The offer would have to be substantial enough to “outbid” Sirius’ offer. This is not an easy thing to accomplish. As of today, with Sirius at $3.10, the “value” of XM shares in this deal is $14.26. Thus, a competitor would likely need to come in with an offer higher that $14.26. While this may seem easy to accomplish, the other potential suitor needs to carry a “safety” factor to account for a rise in the price of Sirius. If that suitor were to offer $15.00 per share, they would be in the driver’s seat as long as Sirius’ share price does not reach $3.27. If Sirius were to reach that price, then Sirius would be the “leading” bidder.

This begs the question of what an appropriate offer would be from an outside suitor. It also begs the question of what will happen to the price of Sirius should such a rumor be confirmed.

Also of note is the current status of the Sirius/XM deal. The boards of both companies have already approved this deal. They also incorporated a $175,000,000 break-up fee into the structure of the agreement. Thus, if one or the other decided to back out of the deal, they would have to pay $175,000,000 to the other. A potential suitor would need to keep this in mind, as this is cash that would no longer be available to one or the other of these companies. In my opinion, the break-up fee is not a huge hurdle. It represents about a quarters worth of revenue for Sirius or XM. However, it does need to be considered in the structure of an offer.

The issue is that if another suitor sees that kind of value in one of these companies, wouldn’t the market see that as well, and the price of the other company appreciate, thus increasing the value of the deal. In my opinion, if another suitor were to come into the scene, they would need to make an offer high enough to insulate their bid from being outdone because of stock price appreciation.

I firmly believe that there are potential suitors out there. The problem they have is the structure of the deal on the table, as well as whether or not they decide to pull the trigger before a decision is made by the FCC or DOJ. In my opinion, if the merger is rejected, the price of these equities may well come down a bit, and one of these companies could be scooped up with less expense. But, is there more than 1 suitor? That is a question a potential buyer has to consider. Is it better to step in now?
These rumors will continue, and it will be interesting to watch how all of this plays out. The source of today’s rumor was not one of the major players in the sector, but this is now the second time that activities such as this have occurred. Sometimes where there is smoke there is fire. Stay tuned.

Position – Long Sirius, Long XM -IMOJB-