After 526 days, merge just the start for Sirius XM

Tue Jul 29, 2008 8:40pm BST

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NEW YORK (Reuters) - The new Sirius XM Radio Inc (SIRI.O: Quote, Profile, Research), which fought for 526 days or 17 months to get regulatory approval of the merger that formed it, faces a discordant reality.

It's bleeding money, subscriber growth has cooled, and it has to reintroduce itself to wallet-weary consumers who are already pinching pennies.

Analysts say shareholders may have to wait a long while to reap the benefits of the deal, which combines Sirius Satellite Radio and XM Satellite Radio to create a radio provider with over 18.5 million subscribers. The deal closed Tuesday.

"These stocks are still valued on multiples of revenue with no cash flow or profitability, facing losses and not showing top line growth as rapid as they have historically," said Stanford Group analyst Frederick Moran. "One should be concerned about valuation absent the excitement of the merger closing."

Shares of Sirius, which took over XM in a $3.3 billion deal, fell 15 percent to $1.60 on Nasdaq after it announced several acquisition-related financing moves, including a convertible issuance that would dilute its outstanding shares.

The completion of the merger, which makes Sirius the second-largest radio broadcaster after Clear Channel Communications Inc (CCU.N: Quote, Profile, Research), comes after a marathon period of government scrutiny that ended late last week, when the U.S. Federal Communications Commission approved the deal, which was first announced in February 2007.

"While the merger is beneficial for Sirius, we remain cautious as significant execution risk exists implementing synergies, and recognition of synergies is probably already priced into stock," said RBC Capital Markets analyst David Bank in a note to clients.

Sirius expects to save about $400 million in 2009 and earn $300 million before interest and investment income, and before interest, depreciation and non-cash stock compensation expenses, otherwise known as adjusted EBITDA. Both savings and adjusted EBITDA should continue growing beyond 2009. Continued...