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Monday, August 07, 2006

Could Apple Buy Sirius Satellite?

Stocks: (AAPL)(SIR)(XMSR)

M&A is in the air. It has been for awhile.

One of the stories that gets almost weekly attention is the idea that XM and Sirius should merge. In some ways it makes sense. The cost of running two independent services is very high, and both companies still lose tons of money. The sales of satellite radios is also slowing somewhat. A consolidation would allow both companies to weather a market that may not be expanding as fast. There would probably be anti-trust issues, and it is difficult to handicap how those would come out.

Sirius still trails XM in subscribers. Its revenue for 2006 will only be $615 million, according to company forecasts, and the company has over $1 billion in long-term debt and nearly $1.9 billion in total liabilities.

In short, Sirius may have an exciting business, but it has a number of hurdles to clear to begin to recreate shareholder value. Even with its higher estimates for year-end subscribers, the stock is stuck below $4, down more than half from its 52-week high of $7.98.

Apple recently announced that the iPod will work with more car radios. GM and Ford will be putting iPod connections into their new vehicles. There is some threat to XM and Sirius here, just as there would by anytime an audio device competes for time when people are driving.

However, the iPod has one huge disadvantage compared to the portable versions of the satellite players. It needs to be toggled to a computer to gets its content. Over time, it may work with WiFi, but that is still not as attractive as a device that can download music in a footprint that covers almost the entire North American continent.

The advantages of having an iPod that can stream audio and video from a satellite are fairly clear. Subcribers to iTunes could get there content "on the run". The advantage of the iPod customer base for marketing of Sirius products is also fairly plain.

If the next version of the iPod were something beyond another upgrade to the Nano's storage capacity with some new navigation, Apple might be able to keep the growth of the iPod at the levels its hit in 2005. Without something very new and different, iPod sales are bound to slow. Sirius and XM are already offering portbable devices that work outside the car, and, over time, if these are successful, they compete with the iPod. The satellite devices have a more attractive model for getting content. Get it from the satellite or the computer. Customer's choice.

Sirius still has to spend hundreds of millions of dollars to catch XM, if they ever do. And Steve Jobs and company have a device that was very hot a few quarters ago but needs a new set of features to drive adoption.

With Apple's market cap at $57 billion and Sirius at $5.5 billion, an acquisition is certainly a financial possibility. Apple had very few problems a year ago. Today, between concerns about iPod market share and stock option grants, the company does not have the hot hand any more.

Just ask Sony if they wish they could have bought Apple in 2002, when Sony's stock was $60 and Apple's was $7.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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