XM Satellite Radio
Sirius Satellite Radio
plummeted Thursday after an analyst slashed his stock price target for both companies, citing competition from other hand-held audio devices.
Goldman Sachs analyst Mark Wienkes wrote in a research note that he is lowering his long-term fundamental outlook and price targets for XM and Sirius shares to $6.50 and $1.75, respectively, from his previous targets of $11.50 and $2.25. Wienkes writes that his target of $1.75 for shares of Sirius is reflective of the value that could be extracted from their planned merger. On a standalone basis he believes XM shares will fall to $6.50, and Sirius to $1.
"We see risk to
the longer-term cash flow profile of both XM & Sirius subscribers," Wienkes writes. "Core demand for satellite radio appears to be falling amongst the younger demographics, vs. rapid increases for MP3 players."
He adds that an increasing proportion of the subscriber base would likely select to be on discounted family plans for XM and Sirius. Wienkes also offers a less optimistic forecast where devices such as the
iPhone and emerging broadcast mobile audio and video devices would be favored over satellite radio.
Shares of Sirius were dropping 32 cents, or 13.2%, to $2.11. XM tumbled $1.83, or 17.6%, to $8.55.
Additionally, Wienkes says that XM and Sirius may choose to raise $500 million to $1 billion in new capital as early as the third quarter, and they will need to refinance at least $1.06 billion (and increasingly likely $1.46 billion) in XM's putable debt. Because of that view, Wienkes believes there is a substantial risk of further equity dilution.
The research note comes a few short days after Federal Communications Commission chief Kevin Martin took the first step toward completing the dragged-out deal. Three months after the Justice Department waved the deal through without stipulation, Martin said that with the voluntary commitments XM and Sirius have made, on the whole the transaction would be in the public interest.
His proposed list of conditions -- price constraints, smaller packages at lower prices, the sale of interoperable radios and additional public interest programming for noncommercial use -- may ultimately be good for consumers. Two of the other four FCC commissioners will also need to offer their approval for the merger to occur.