It's been more than a month since Mel Karmazin poured some badly needed fuel on the flickering flame known as satellite radio stocks by single-handedly prompting takeover speculation within the industry. But the weeks since then have not been kind to investors.
The outspoken chief executive officer of New York-based Sirius Satellite Radio Inc. sparked a rally in June when he suggested a takeover involving XM Satellite Radio Holdings Inc., his Washington-based rival, is possible.
“Would I like to buy them? Sure,” Mr. Karmazin told an industry conference in New York as investors began piling into the shares that afternoon.
Such talk is nothing new for satellite radio, an industry that began five years ago in the United States and launched last year in Canada. A fresh rumour of an XM-Sirius alliance crops up at least once a year, creating a stir in the markets when it percolates.
XM shares gained 6.8 per cent in the hours after Mr. Karmazin spoke, while Sirius surged 5.1 per cent on three times the company's average trading volume.
The mini-euphoria appears to have spread north of the border as well, where shares in Canadian Satellite Radio Holdings Inc., which operates the XM franchise in Canada, rose 5 per cent in the following days.
But the rally was short-lived and the shares have fallen steadily since then.
Aside from the temporary buzz created by such speculation, market watchers say there are few reasons for investors to get excited about the industry amid continuing losses.
“As an investor, the stocks have been slammed because the market wants them to have continually accelerating growth,” said Steve Mather, an analyst with Sanders Morris Harris in Los Angeles who tracks the industry. “And in the real world you don't get continually accelerating growth.”
The U.S. operations of Sirius and XM both reported deep second-quarter losses of $238-million (U.S.) and $230-million, respectively, in the past two weeks as the companies spend aggressively in a heated battle for subscribers.
In Canada, where Canadian Satellite Radio launched in late 2005, the company remains in startup mode. However, losses associated with getting it off the ground hit $20.4-million (Canadian) in the recent quarter and investors have responded. The company's shares slipped to $8.50 last week, their lowest point since December's initial public offering at $16 a share on the Toronto Stock Exchange. (Sirius Canada is not publicly traded).
Despite rosy projections for the future, the satellite radio companies are having a tough time convincing shareholders. Sirius increased its subscriber projections for 2006 to 6.3 million last week, up slightly from previous expectations of 6.2 million customers, but the news had little effect.
Sirius shares fell Monday to $3.81 (U.S.) on the Nasdaq Stock Market, less than half their 52-week high in December.
If investors are looking for relief, Mr. Mather suggests they could be waiting a while. Merger speculation may be the only thing lifting the industry these days, but it's an unlikely saviour since a deal would face too many hurdles, he said.
“It's ridiculous, absurd, preposterous, illogical — pick your adjective,” Mr. Mather said. “They would never be allowed to go from two companies to one.”
Beyond the obvious monopoly concerns from U.S. regulators, Mr. Mather believes the biggest problem is justifying the price tag of a takeover.
“You've got to pay $6- or 7-billion if you want Sirius, and there isn't $7-billion worth of synergy there,” he said. “And if you want XM, you're going to pay $4-billion. And there isn't $4-billion worth of synergy there either.”
That hasn't stopped investors from warming up to the idea, or at least trading on the immediate jump the speculation creates.
“It was huge,” Mr. Mather said of the rally Mr. Karmazin's comments created. “But it was silly.”
