Today it was made public that Chairman Martin not only would be issuing a draft order regarding the merger of Sirius and XM, but that he indeed supported the merger. This is probably the most positive news that SDARS has seen since the DOJ announced approval back in March.
What today’s activities mean, at a minimum, is that Sirius and XM have reached an agreement in principal with the Chairman of the FCC, and likely some of the other commissioners as well that would allow the merger to progress.
I have stated that I expected the draft order to be circulated by Wednesday. I would expect that Sirius and XM have already made a filing outlining not only the voluntary concessions that could not be mandated by the FCC, but also the other concessions that were within the power of the FCC to mandate. I would anticipate this filing to be published on the FCC website as early as tomorrow morning. This filing will give the basis for the vote that the commissioners will have within the next couple of weeks. The filing will also give the street their first look at the concession list.
It is my opinion that at this point all concession negotiations are now essentially complete, and the vote is the finish line that sector watchers have been looking and yearning for. All of this is now within site.
Understanding that 1) negotiations are complete and 2) that Martin, who supports the merger, would not call a vote unless he was relatively sure of the outcome causes me to conclude that a positive outcome is only two weeks or so away.
For whatever reason, the street was still a bit gun shy with today’s news, but that may well change tomorrow when we get concrete evidence of the exact conditions of approval. Today, analysts offered various opinions:
RBC analyst David Banks outlined the timing of events, which I happen to agree with:
1) An official order is issued by the FCC
2) The Chairman and 4 FCC Commissioners (3 Republicans, 2 Democrats) submit votes—the Republican votes are likely to come first. This is where modest additional delays could occur as one of the Republican Commissioners could refrain from voting (due to unrelated political agenda) (I, Tyler Savery believe this is Tate) unless a public meeting is held.
3) The final 2 Commissioners (likely to be the 2 Democrats—Copps and Adelstein) customarily have 10 days following the Monday after the 3rd Commissioner vote (likely to be either McDowell or Tate) to submit their votes. Precedent indicates Democrats would probably not try to delay the approval process further if 3 other Commissioners vote in favor of deal.
4) Merger is officially approved by the FCC.
I believe that Banks and his source are very correct in the timeline. If the 3 votes all happen by this Monday, then we could see the other two by the first week in July. If Sirius and XM have been successful in their meetings with Copps and Adelstein (they may have more meetings this week in my opinion), then the 10 day wait may not happen. This would allow for approval by the end of June. I have long felt, and expressed in the past, that commissioner Tate was somewhat of a wild card that would ultimately voote to approve the deal and that it was a matter of concessions
Barrington sees a longer process and states, “FCC Chairman Kevin Martin is now reported to back approval of the satellite radio merger. The other four commissioners have not weighed in with their votes. Still, Mr. Martin’s support should strongly tilt the balance toward approval. A favorable ruling by the FCC along with the prior approval of the DOJ could enable closing of the deal perhaps as soon as over the next several weeks, though there would still be a couple of issues to iron out.”
I guess the definition of “‘several” needs to be considered. I have always looked at “several” as a number greater than a “few” and less than a “dozen”. In my mind “several always translated into 7 or 8. I simply do not see the merger process going on that long.
Wachovia’s Jeff Wlodarczak sees the merger gaining approval, but feels that upside is already built in to a certain extent. The analyst stated, “We continue to believe sat radio cost structures and business models need to be right-sized for a market that is significantly smaller than the companies originally anticipated. While merger approval at this point appears to be an inevitability, a roughly $11B combined company enterprise value already reflects a very rosy scenario in our view.”
To a certain extent, I agree that the upside is limited in the short term. It will take a few quarters for everyone to fully grasp where SDARS is headed in a post merger situation. The longer term outlook in my opinion is fine, but the size of the immediate pop may be held back by battle fatigued investors.
Tom Watts of Cowen feels that the concessions outlined today are better than expected. In his note, Watts stated, “Two More Votes Needed, Likely Over Next Week. Two of the remaining four commissioners must support him, which we expect. We expect final FCC approval by the end of next week.”
I agree that the votes needed are likely in hand. The timing of the end of next week is also something that feel is not only reasonable, but likely. Watts rates XM an outperform.
Utendahls Alden Mahabir sees the concessions as on par with their expectations, but is unsure of the outcome. The analyst noted, “We believe it is hard to say which way the other four commissioners will vote, as they have been fairly tight lipped in their opinion. That said, some of the commissioners could find that the transaction may need additional conditions before being approved or that the merger is anti-competitive altogether.”
While this opinion seems off kilter with my own, nothing is never a foregone conclusion until it happens. I happen to believe that Martin would not have taken this step unless he had a relative certainty about the outcome. The fact that Sirius and XM executives are making the rounds at the FCC leads me to believe that there is a comfort level on at least three votes. Mahabir has a $4.00 and $19.00 target on Sirius and XM respectively under a merger approval situation.
Janco feels that with Martins endorsement, and a vote along party lines could mean approval at any point in time. In a note today Janco commented on some of the conditions, “There were two new conditions that we saw: First, the allocation of 24 channels for noncommercial and minority broadcasters; and second, the notion of “open radio”. The 24 channels were higher than we had expected; however, we do not believe that SIRI/XMSR will walk away from the deal over 24 channels. “Open radio” allows any manufacturer to produce a satellite radio, which we think is a nice idea in concept; however, the limited volume will probably not be attractive to many of the CE manufacturers. Therefore, we do not believe this condition will have an effect one way or another.”
I see the conditions as not stripping away value. The channels will still be part of the Sirius and XM system, and will not be available to non-subscribers in my opinion. This means that regardless of what is on them, Sirius and XM will get value for them any way.
In my opinion, there is market confusion over the activities of today. The step taken today is much bigger than many think. This is essentially a green light for the merger, and the formality of a vote is the only missing component. The concessions are not overly harsh, and do not strip away synergies or value from the deal. The conditions allow the company to preserve the existing service for the customer base while at the same time allowing for room to migrate to a single system.
There seem to be several opinions, but in simple terms, it is my opinion that this deal is now signed and sealed. It is only the delivery that we are waiting on. For sector watchers, some of the confusion that happened today will gain clarity in the next couple of days.
Position – Long Sirius, XM.