Tuesday, January 23, 2007

Bear stearns Issues Note On Potential Merger

January 23, 2007

Bear Stearns' Bob Peck, a highly respected analyst in the satellite radio sector, issued a note this morning estimating merger synergies and establishing 2007 EOY subscriber levels. Key points of the report are as follows:

$6.7B in Synergies.

With anticipation building that the DARS companies may be getting closer to an attempted merger, we wanted to quantify what the value of a MergeCo could be. In taking several simplifying and sometimes conservative assumptions, we believe the NPV of savings / synergies could reach $6.7B.

No Major Rev Benefits.

- Our assumptions conservatively include no revenue from additional services benefits, as we believe that MergeCo would need to operate both satellite systems for the near term to avoid shutting off one system's subscribers. We think longer term, potential additional revenues could augment our synergies estimate meaningfully. On cost savings, we believe the largest contributor would come from OEM & Programming. For the most part, we assume premier content costs will not be adjusted significantly after coming off contract, as DARS will still compete with other delivery technologies.

Stock Implications.

- We intrinsically value XM at $17 by YE 2007 and a fair value estimate for Sirius at $4. Assuming a "merger of equals", the MergeCo could be worth $20B or approximately $27 per share for XM and $6 per share for Sirius by the end of the year. We believe that only 2% of the potential synergy benefit is incorporated by the market into today's stock prices (down from 25% a week ago).

Merger Talk to Drive Stocks.

- We continue to believe that merger anticipation will continue to drive the stocks in the NT, outweighing fundamentals. Hence we have a positive bias on the names. However, we underscore that we are unclear if a deal would overcome the regulatory hurdle, which could prove insurmountable

Setting 2007 Sub Est.

- We have also reviewed our model to adjust for recent trends (weaker retail). We now estimate XM and Sirius will end 2007 with 9.2-9.3M and 8.1-8.2M subs respectively, down from 10M and 8.5M, respectively.

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1/23/2007 09:20:00 AM

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