Directed Electronics has a lucrative distribution agreement with Sirius, but renewing that agreement may be difficult when the contract expires if the proposed XM-Sirius merger passes.
Under the agreement with Sirius, Directed distributes Sirius receivers, tuners and other accessories - comprising over 90 percent of Sirius' aftermarket volume. The deal between Directed and Sirius is set to expire in April 2008.
On Wednesday, RBC Capital Markets analyst Scot Ciccarelli cautioned that Sirius' issues may weigh on Directed's share potential.
"We were already concerned about the pending expiration of Directed's contract with Sirius given our expectation for a more difficult negotiation, but the pending merger of the two satellite operators has magnified our concerns," wrote Ciccarelli in a client note.
"XM and Sirius will push hard to get this deal done and maximize cost synergies without significantly raising their monthly fees (a possible requirement for regulatory passage) which will likely squeeze their respective business partners – including Directed, in our view."
Ciccarelli said there are also worries about changing market conditions and the satellite radio model begins to move from a retail to an OEM driven model.
Directed has already warned that's its Sirius sales could be slowing, with sales of its satellite radio products expected to decline between 11% and 22% in 2007. The company acknowledged that retailers were left with 30 to 90 days of excess inventory of Sirius products, depending on the dealer, at the end of last year. But dealers are now supposedly working through that inventory and some are beginning to reorder in larger quantities.
[Forbes]
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