Analyst trims expectations for sat radio merger

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NEW YORK -- A Stifel Nicolaus & Co. analyst Friday reduced his expectations for a successful combination of XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc., though he noted that a deal approval would send shares soaring.

Sirius in February said it wanted to acquire its sole satellite radio rival, XM Satellite Radio Holdings Inc., and at the time the deal was valued at $4.7 billion.

Kit Spring, in a client note, trimmed his expectations of a merger approval to under 50%, from a prior 55% expectation of an approval. He cited negative news related to the proposed deal, including repeated comments by regulators and lawmakers that the deal faces significant hurdles.

Existing rules ban a combination of the only two satellite radio operators, while the companies say a combination would not constitute a monopoly because the medium competes with other outlets, such as terrestrial radio.

Spring noted that Wall Street sees only a 10%-20% chance of the deal being approved, which means shares could leap if it is in fact ultimately successful.

However, Spring still has high expectations for the industry, regardless of a combination.

"We find both XM Satellite and SIRI attractive on a stand-alone basis, given we continue to believe OEMs (original equipment manufacturers) will make satellite radio standard or near standard by early next decade allowing the companies to become highly profitable within five years," wrote Spring. Many auto makers are incorporating satellite radios into newly-built vehicles.

Spring has a "Buy" rating on both stocks.
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