Satellite Radio Stocks Not Exactly Sky-High

You’d think that after an 18-month wait for FCC approval, the stocks of soon-to-be-combined Sirius and XM Satellite Radio would be higher.

Doesn’t the deal mean subscriber-acquisition costs will go down? Now that the two companies aren’t fighting over talent, won’t those monumental payouts for talent come to a halt? Aren’t sports fans more likely to sign up now that NFL and MLB games can be had through the same service? Why isn’t Wall Street reacting positively to these developments?

The problem here is that both firms, because they were forced to sit around waiting for their merger to be blessed, are heavily in debt. Together the companies should end up $3 billion in the red. Since neither Sirius nor XM are cash flow positive and aren’t yet in a position to pay down the debt, the common stock just doesn’t make sense as an investment.

Right now the bond bullies are in charge at Sirius and XM. And it’s these bondholders that will enjoy an upside in these two companies. So if you’re looking for a way to get in on the action, Cramer recommended you become a bond bully, too.

Today, XM announced a $550 million offering for senior subordinate notes due in 2014 that are exchangeable into Sirius common stock. Granted, we don’t yet know the coupon, or the interest to be paid, or the rate of exchange into Sirius’ stock, but this is still a better play on the merger than buying common stock, Cramer said.

According to the International Finance Review – a respected judge of these matters, Cramer said – the coupon will be between 6% and 6.5%, and the conversion premium will be between 20% and 30%. That means the notes will be 20% to 30% more expensive when they’re issued than the price of Sirius’ stock. So what you get is a nice 6% to 6.5% yield while you wait for Sirius’ stock to climb 20% to 30%, at which point you can sell the stock for a profit. Get it? There’s upside if the common stock works but no downside if SIRI does nothing. In the meantime, you enjoy the coupon payments until 2014.

The other possible strategy is getting in on XM’s 10% convertible bonds due in 2009. Originally the payout was 1.75%, but XM upped that number to 10% so that holders wouldn’t come looking for there money once the merger happened. (This and another similar bond offering, for an even bigger percentage payout, are a big part of the company’s debt.) If you can get your hands on these 10% bonds, Cramer recommends you buy some.

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