Consolidation in the Canadian satellite radio market is finally about to take shape after the CRTC this week gave its blessing to the merger of Canadian Satellite Radio Holdings Inc.'s and Sirius Canada Inc.
The combined company, which will carry the Canadian Satellite Radio Holdings name, had been anticipated since the summer of 2008 when Sirius Satellite Radio Inc. bought rival XM Satellite Radio Holdings Inc. in a $5-billion (U.S.) deal. The Canadian companies rely on their U.S. counterpart, Sirius XM Inc., for much of their programming.
The merger north of the border was held up by a number of factors, including disagreement over how much value each company would bring to the combined entity.
With most hurdles now cleared, TD Newcrest analyst Scott Cuthbertson believes the merger will close by the end of May and mark a turning point for the Canadian satellite radio industry.
"While we had some concerns over the liquidity and ultimate viability of XSR as a stand-alone entity, the proposed merger creates a materially more profitable and viable entity, in our view, which may create value for XSR shareholders," Mr. Cuthbertson said in a research note today.
The combined company should have a subscriber base of about 1.5 million, far above the 700,000 customers Mr. Cuthbertson had estimated would be necessary for a stand-alone XSR to break even. He estimates the company can realize $20-million (Canadian) in synergies in the 18 months after the merger closes.
While hard to peg the future growth and financial performance of the merged entity, Mr. Cuthbertson said he's "much more optimistic" about its prospects and equity value going forward.
But he believes - for now - the market has already mostly priced in the value of the combined company.
Upside: TD Newcrest resumed its coverage on Canadian Satellite Radio Holdings by upgrading its recommendation to "hold" from "reduce" and set a 12-month price target of $3.50. "With less than a 20 per cent all-in potential return to our target price and a high risk rating, we do not see a really compelling opportunity at current prices," Mr. Cuthbertson said.
Cineplex Inc. and Empire Theatres have formed a new partnership to deploy digital projection equipment. The Canadian Digital Cinema Partnership is expected to convert more than 1,600 35mm projectors to digital and has already signed long-term deals with three studios, including Twentieth Century Fox and Warner Bros.
"This announcement is positive for Cineplex, as it should reduce digital capex going forward, while accelerating the rollout of digital screens," commented CIBC World Markets Inc. analyst Robert Bek.
Upside: Mr. Bek raised his price target by $1 to $25.50 while reiterating his "sector outperformer" rating.
Despite reports over the last few weeks that the Japanese earthquake and tsunami had created production problems in the automotive sector, first-quarter North American light vehicle production came in 13 per cent higher than the fourth quarter. As a result of the higher-than-expected production, as well as favourable foreign exchange rates, CIBC World Markets Inc. analyst Michael Willemse increased his first-quarter fully diluted earnings-per-share estimate for Magna International Inc. by 5 cents to $1.30.
Mr. Willemse trimmed his full-year forecast due to higher raw material costs, but said he believes downward earnings revisions are well priced into the stock.
Upside: CIBC reiterated its $65 U.S. price target for Magna.
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