Auto sales are down. This has been the month after month news item for most auto manufacturers. With the exception of a few bright spots, the entire auto industry is in a slump. With high gas prices, many companies are offering clearance prices on what are now considered gas guzzling trucks and SUVs. Four cylinder cars are now the hot commodity, and even many of these simply are not selling at the needed pace.
For satellite radio sector watchers, the slumping sales in the OEM channel is an undertone that, coupled with the lack of a merger decision, makes many investors have pause in the sector. In an environment where good news seems to always be followed with a pause and then bad news, it is hard for the satellite radio equities to see any momentum.
Many analysts started off 2008 seeing the OEM channel as a driver for satellite radio subscriptions. Most used some base assumptions, projecting subscriber numbers based on a certain level of car sales happening combined with a bigger ramp-up in the rate at which SDARS receivers are installed. Now with half of 2008 gone, and car sales still slumping, there could well be some adjustments in the models that analysts use.
Once the merger is completed, it is anticipated that these companies would have to spend a great deal of time marrying together their infrastructure, and delivering programming that existing subscribers want from the other service. Consumer confusion during the merger process has been extreme, and that confusion will likely continue for a period of time even after the merger is approved.
As the landscape in the big financial picture keeps changing, the level of concern by the street in the SIRI debt takes on a posture that simply would not have existed a year ago. The situation may have been far different if the merger process could have been shortened by only six months. People have oft tried to quantify exactly how much of a toll that the prolonged merger process has had on the company. In point of fact, that toll can not yet be quantified because the ramifications are still with us. Until this debt can be handled, the drag on the equity is still happening.
From a cash flow and revenue perspective the SIRI debt may have looked attractive to lenders only six months ago, but now times differ, and those would be lenders have more grave concerns on their minds. Simple survival precludes new business.
Whether you believe in the sector, or not does not really matter. The question at hand is whether Sirius XM Radio can either weather the storm, or get the financing handled in such a way that the cash flow model remains stable, or that is not dilutive to the stock. Only time will tell, but given the situation with potential suitors, the debt issue does not look to have a short term solution at this point unless Sirius steps to the table with a firm such as Goldman or Bank of America.
At this point the concerns with Sirius XM Radio may be more about the financials sector than with the operations of the company. In the past, it has been enough to simply worry about a company you invested in. Now, you have to worry about the companies that in the past have been the lenders as well.
There are likely still some rough roads ahead with the satellite radio sector, as well as any other sector. What is happening in the financials will have a trickle down effect. Right now those seeking lending are in a game of musical chairs. The difference from the past is that a lot of those that used to host the musical chairs game are now players in it as well.
The company will also likely need to refinance existing debt, and renegotiate various deals with content providers, automobile manufacturers and talent. Such negotiations are expected, but could raise concern. In particular, the credit market is not now what it was when the merger was announced.