XM Sirius Merger. Are you Serious?

XM and Sirius to merge. Give me a break. Did we all of a sudden develop Alzheimers and forget about what Federal Communications Commission Chairman Kevin Martin told reporters after a January 2007 FCC meeting that the Commission would not approve a merger between satellite radio rivals Sirius and XM Radio. According to Bloomberg, Martin said that "there is a prohibition on one entity owning both of these business." The transaction is expected to be structured as a merger of equals, but given Sirius' higher enterprise value, shareholders in the Mel Karmazin-led firm will likely come away with a larger piece of the pie. XM Chairman Gary Parsons will retain that title in the merged firm, with Karmazin likely taking the CEO title. It is a bit fuzzy as to what will happen to XM CEO Hugh Panero.

The interesting thing is the merger announcement happened on President's Day, when US markets are closed. So I took the liberty in the closing minutes of trading on Canadian markets to short the stock at $8.30 per share. Total volume on the stock is 73,000 shares, so this sucker is thinly traded. But the stock popped 25% on the news. Is that rational? Is this a done deal. Obviously not given the FCC's comments, and in fact far from it. I think XM and Sirius will obviously pop tomorrow on US exchanges, but probably closer to 15%, not the lofty 25% premium investors awarded the Canadian sub stock today. Last time I checked, both U.S. and Canadian regulators were not in favor of allowing monopolies to exist, however they may consider it. The deal also values XM at a 23% premium to Friday's close. Now that holds true if SIRI's stock holds steady on the news. If it falls, and it may, that premium diminishes because this is stock swap, not an all cash bid. It's interesting to note of course that XM was up 8% on Friday on heavy volume. I smell an insider trading probe on the horizon. I think the SEC needs to crack down on crap like that and investigate the suspicious trading taking place that week.

Now lets also look at the economics here as well. Both of these players still lose money. That will not change when, and if, they do merge. Looking at Lehman's model highlights losses out to 2009. Of course costs would go down on a combined basis. But at the end of the day, will people be willing to pay for the service. At $13 per month, one would be crazy to when they can either customize their ipod for a fraction of the cost or listen to internet radio of any flavour they chose for FREE. I think we will also see more car manufacturer mergers in the coming years, which means fewer cars to have satellite radio pre-installed on. And progressing even further, the new wave will be mobile tv on handheld devices.

Canadian Satellite Radio Holdings operates as XM Canada through its subsidiary, Canadian Satellite Radio Inc. Trades on the Toronto Stock Exchange under the ticker XSR. I expect XSR to sell off 5% to 10% on the news on Tuesday Feb 20, 2007. If there is heavy retail buying in the stock tomorrow, given this will make front page news in the Financial Post and Globe and Mail (2 leading Canadian newspapers), I think that would provide another opportunity for investors looking to take short positions on the stock. The market is full of scenarios where there are over-reactions. This seems to be yet another case. I am a big believer in the old stock adage quoted by many investors, including Warren Buffet, that states: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." This is one time to be fearful.