Partnerships

In an effort to improve their financial situation, Ford Motor Company has sold two thirds of their stake in Mazda. The move garnered Ford $538 million in cash, and now has Ford with only a 13% stake in the Japanese automaker (Ford is still the largest shareholder). The move still has Ford and Mazda aligned as strategic partners. At one time Ford owned 1/3 of Mazda.

The news about Mazda comes on the heels of GM selling off their stake in Suzuki, and with the backdrop of the government considering various options for a possible bail-out of the Big Three. Car sales are still down, and Ford will be doing several things in an effort to boost sales. Employee pricing, cash rebates of up to $6,000 and 0% financing will all be options for Ford shoppers in December.

For satellite radio sector watchers, the biggest concern is not who owns the auto company, but rather when consumers will begin to own new cars again. The OEM channel is the biggest factor in satellite radio’s ability to gain new subscribers. The take rate for satellite radio on new cars is 47%, down from about 50%, as economic woes and anemic car sales begin to take their toll on the satellite radio sector.

Mazda will still offer Sirius as the base service in their vehicles.

Position: Long SIRI, None Ford or GM.

Convinced that U.S. Automakers are in big trouble, President Elect Obama is seeking a $50 Billion bailout that could inject enough money to get the automakers through their current crisis. If approved, the measure would need the support of President Bush, a Czar would be placed in charge of the automakers to oversee the companies receiving aid.

While this cash infusion would indeed give the companies time to get things running more smoothly, there are many issues in the auto sector that need to be addressed. With pensions and jobs on the line, this is a political obstacle course that will be hard to navigate. Unions will want their piece of the pie, as well as certain guarantees. However, if the problems that caused this instability are not remedied, it is possible that we could simply be throwing good money after bad.

In 1979, the government stepped in to help bail out Chrysler. The bail-out was a success because Chrysler developed decent cars at decent prices. The bailout trickled down to the consumer level. If this $50 Billion does not trickle down, then the ultimate success of such a bailout may not carry the same level of success. With auto sales down, there needs to be a stimulus for consumers to have the confidence to buy. Tight credit markets do not help the situation, and short term 0% promotions leave consumers with too large a payment.

For investors in satellite radio, the prospects of a bailout for the auto sector is something to watch closely. Should sales pick up, it will mean more installations, more exposure to consumers, and eventually more self paying subscribers. Because the OEM channel is such a big factor to satellite radio, watch for reaction in price for SIRI on any bailout news.

Position: Long SIRI.

In news that for some is no surprise, Circuit City, the second largest electronics retailer in the U.S., has filed for bankruptcy. The company plans to stay open for business through the holiday season, and in what seems an odd statement, it may actually help the situation for Circuit City, but also for several companies that sell electronics gear.

Consumer confidence is low, and everyone is watching each dollar more closely. Consumers are looking for deals, and knowing that Circuit City is in bankruptcy may spur value conscious people to shop at the retailer, and by extension move product. While I can not picture people buying any “extended warranties” (typically a money maker for electronics stores) from Circuit City, I do see a potential for people to take this opportunity to pick up gear at what they perceive as lower prices.

Circuit City stock fell to 11 cents per share before being halted.

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Sales figures from auto manufacturers are starting to hit the wires, and the news is not good. The poor sales in the auto sector are now so bad that even with increased penetration of satellite radio installations, there will be an impact to the sector.

GM sales were off by an astounding 45%, Ford sales were down 30%, Honda took a 25% haircut, and Toyota was down 23%.

Many were expecting bad news, but sales down 45% is a big number to swallow. It is little wonder that analysts have taken it upon themselves to lower subscriber targets for satellite radio. As with anything, one must also look for a silver lining, but in this case that is a hard task. Sure, Sirius XM will have less spent on subsidies, but in the end, they still do need to grow their subscriber base, and the focus on the OEM channel makes their numbers vulnerable with auto sales at record lows.

Perhaps it is time to shift gears. Perhaps the company should throw some marketing support behind the a-la-carte receiver and the new XMP3 player. If consumers are holding onto their cash, perhaps they will be inclined to make their time in the car more enjoyable via satellite radio.

Times are indeed hard. Consumers are clearly holding onto cars longer. Investors should watch for analysts that have not issued reports recently to begin issuing updated models soon. The car news today may even bring out new reports from those who had already updated models, but did not anticipate a 45% nosedive by GM, which is the biggest satellite radio contributor in the OEM channel.

Position: Long SIRI

If we all thought the merger process of Sirius and XM brought interesting times, imagine all of the comments that will come if Chrysler and GM pull the trigger on a rumored merger/acquisition! One thing that may be certain is that the auto companies can cite a “failing business” as a reason that such a deal should be approved.

For satellite radio, the deal could be very interesting. The biggest XM OEM partner joining up with the biggest Sirius OEM partner. As sector followers are aware, GM has an exclusive deal with XM, and Chrysler with Sirius. Interestingly, the GM deal has clauses that speak to what could transpire if a GM brand were to install Sirius radios, and that may bring about discussion of getting a fully interoperable radio into the OEM channel earlier than may otherwise have happened.

Now, to be clear, the satellite radio deals could play themselves out as currently structured. However, an automotive marriage could also mean that Sirius XM Radio will get a chance at renegotiating the current deals. It is widely known that the GM deal is expensive for satellite radio, and more than one analyst had made reference to that fact. Thus, it would benefit Sirius XM Radio to at least try to better their current deals should GM and Chrysler hook up.

Cerberus Capital owns 80.1% of Chrysler, and 51% of GMAC (the financing arm of GM). One proposal would have Cerberus trading their stake in Chrysler to GM for the remaining 49% of GMAC. It is an interesting proposal. Chrysler sales are way down, and credit markets are tight. The deal would solidify GM’s position as a sales leader. Toyota has been chipping away at GM for a few years, and sometimes has been known to outsell the biggest U.S. car maker.

If there was ever a time to propose such a deal, it is now, and it may just have a decent shot at passing regulatory muster. The markets next week will be interesting to watch as the government takes a stake in big banks, and big automakers try to find solutions to their sales woes.

Position - Long SIRI, No Position GM

While reading some articles hitting the headlines today, I noticed one for the Detroit automakers. Since Sirius XM is obviously dependant on OEMs, I decided to take a look.

The $25 Billion that the government is putting up is actually not a true bailout, it is a loan. A quote from the article: “… the loans would probably amount to at least $5 billion for each of the Detroit 3, plus smaller amounts for suppliers.” Is Sirius XM considered a supplier for the automakers? I would sure consider them one, but then again, this is the government we are talking about, so who knows. If in fact they do fall under this provision, it would allow them to borrow money from the government at interest rates as low as 4%. How much would be available to them is another question. This could be one possible way for Sirius XM to refinance at least a part of their upcoming 2009 debt.

Regardless, the automakers having a nice infusion of cash will allow them to produce better and more fuel efficient cars and sell more cars, which would definitely be a win for Sirius XM.

Position: Long SIRI.

I and it seems many other GM consumers, received an email today from General Motors. It would appear that OEMs may start to do their part regarding possible merger confusion. Here is the email:

At GM, we’re focused on each and every aspect of our owners’ driving experience. So we’ve naturally paid close attention to the merger of XM and SIRIUS.

The merger has been approved, and now XM and SIRIUS will move forward with their plans. I’m writing today to tell you that we think that’s great news for GM owners. Here are three reasons why:

You’ll have new choices. A combined company will be able to offer an even broader spectrum of audio entertainment. You’ll have the choice of the best of both companies’ programming.

You’ll get new pricing and packages. In fact, there will be exciting new subscription packages that combine the best of what each company has to offer. Packages including the best of both XM and SIRIUS programming will be priced below the cost of subscribing to them separately.

You’ll use the same radios. XM has guaranteed us that no radio will become obsolete due to the merger. Both companies have millions of radios entertaining loyal listeners. The combined company wants subscribers to enjoy those radios more than ever!

There’s nothing you need to do right now. Look for an e-mail in the next few months with programming and pricing specifics. For any questions in the meantime, go to xmradio.com.

XM and SIRIUS will soon bring you the level of service you’ve come to expect, along with new plans and programming that will exceed your expectations. You, as a valued GM owner, deserve nothing less.

It is a small step, but it is a step. Getting the OEMs to embrace the change is definitely a good start.

Position: Long SIRI, No Position GM

During the proposed merger of Sirius and XM, the National Association of Broadcasters made point after point that they were all about local content. So strong was the feeling that they lobbied strongly to ensure that satellite radio not be allowed to broadcast local content through their repeaters. There have even been times where the NAB has argued against traffic services broadcast on satellite, and even more specifically against an auto dealer advertisement that seemed geared to only one regional area.

Prior to the new Media Ownership rules established by the FCC, the general public expressed many concerns with the lack of localism. Now, NPR seems to be echoing those concerns.

According to an article published on FMBQ, NPR President Kevin Klose speaking at a media conference stated, “…commercial radio lacks authenticity and has lost its local voice.”

Klose also noted, “What we have seen in the mass media is a consolidation followed by reconsolidation and reconsolidation. You end up with these hidden conglomerates that own the local voices. Then they do away with those local voices.”

Klose attributes the audience growth of NPR to consumers seeking to escape from the a lack of impartial information on the airwaves, and that for many NPR represents some sort of safe haven for listeners. Whether this is the case or not is a matter of opinion, but what is telling is that NPR was heavily involved in fighting against the merger, citing that a merged Sirius and XM would carry an impact on localized radio. The latest statements by Klose would seem to indicate that localism has been gone for quite some time.

Thanks Rulon!

Position - Long SIRI

General Motors has announced that all 2008 and some 2009 vehicles will be available to every day consumers for the employee discount. The Employee Discount promotion started in 2005 and boosted GM’s sales in a big way. Other auto makers have offered similar promotions as well from time to time. GM, who markets the promotion strongly with well pointed ads, has been busy with commercials during the Olympic Games on NBC.

Steep auto discounts was one of four factors that I felt would boost auto sales. While other turn around factors have still not been met, the Employee Discount Program offered by GM may be enough to stabilize sales for the auto maker, which in turn will help satellite radio subscription numbers. For consumers, there is also additional cash incentives on top of the already discounted price.

General Motors has been the largest installer of satellite radio since the beginning. While the deal is expensive, it does help boost the subscriber numbers and could be a factor in getting Sirius XM to cross the 20,000,000 subscriber hurdle by the end of the year.

At this point it will be interesting to see what other auto makers do in response, and whether that will fuel stronger automobile sales in Q3.

Position - Long SIRI, No Position GM

Being in Times Square New York affords the opportunity to see many things. Today I saw that the American Muscle Car is alive and well. I also saw enthusiasm from passers by, and people very interested in Dodges return to Muscle Car glory. Passers by stopped and were talking about the looks of the car, the speed of the car, and the price point, which no one seemed to bat an eye about.

While this Challenger SRT is being driven on a tour around the country, it could have been driven by anyone. This car was approachable and exciting. In Times Square I have seen Ferraris, Beemers, and other high end cars around. People glance, and admired them from afar. With the Challenger, people were gravitated to the car from the first second it pulled to the curb.

Scott Vandekerckhove, the representative driving the car, could barely get out of the drivers seat before questions about the car started coming from the building crowd. He couldn’t even keep his hands on brochures.

Being a satellite radio enthusiast, my trained eye went right to the roof line in search of the satellite radio antenna. Of course, it was there. It is on all 6,400 of these cars that were built in 2008, which carry a fully loaded sticker price of about $42,000 . Scott Van (he said I could shorten his name), was very personable. He answered questions, popped the hood open, and even let me take a seat behind the wheel of this beast.

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