Tuesday, January 16, 2007

BOA's Jacoby Cuts Rating On XM

January 16, 2006

Banc of America Analyst Jonathan Jacoby has downgraded XM Satellite Radio to neutral from buy. According to Jacoby there is limited upside potential and significant downside if the firm does not merge with rival Sirius Satellite Radio. Jacoby also states that even in the event of a merger, many of the cost savings would not materialize until 2010, citing that the systems are not interoperable.

- A merger attempt appears more likely given recent commentary by managements and numerous press articles, and the value of synergies could be huge - $5B by our estimate. Recent comments made by managements for XM and Sirius at investor conferences suggest that both would be interested in pursuing a combination, though an agreement on pro forma ownership and newco management could remain elusive (both companies have expressed a need for their shareholders to have a majority stake in the newco). Our view is that a merger would have to be announced in the next 4-8 weeks if there is to be a reasonable chance of clearing regulatory hurdles before the '08 elections.

- BUT several factors suggest that the upside potential for XMSR stock is now limited, and if no merger occurs XM & Sirius have significant downside risk:

- Consensus subscriber estimates need to be reduced – suggesting that the intrinsic value of each standalone company is lower than perceived. We have revised our subscriber estimates lower for both companies. Our new yearend ’07 sub est for XM is 9.2M (from 9.7M). For Sirius, our new year-end ’07 subscriber estimate is 8.2M (from 8.7M). Our new standalone equity share ests. for XM & SIRI are $13.50 (from $17) and $2.50 (from $3.50), respectively.

- Full realization of synergies could take several years (making value estimates more uncertain), and current stock prices appear to have "baked in" much of this potential value. Most cost savings wouldn't be realized until the end of the decade.

- Our contacts in D.C. suggest that procedural hurdles could stop a deal from getting through the FCC. On competitive grounds, a merger probably would pass. BUT the Achilles heel for sat radio could prove to be the existence of a regulation that requires two satellite radio operators. The FCC might not be able to simply waive this, it seems that might have to be formally changed. This potential procedural hurdle + general FCC inertia reduces the probability of approval before 08 to something less than 50%, in our view.

- We estimate that XM stock is worth ~$19 if a merger deal with Sirius is closed, suggesting little potential upside remains; SIRI would be worth $4. If the newco equity is split 50/50, we estimate that XM shares would be worth ~$19. Although more bullish sentiment might cause both stocks to trade higher following an official announcement, we believe that investors should be cautious as underlying fundamentals continue to weaken and synergies will take years to materialize.

- We have downgraded our rating on XMSR to Neutral from Buy, but we still prefer XMSR to SIRI. Our price targets for XMSR and SIRI are unchanged at $17 and $3.50, respectively. In our view, SIRI still has less upside potential AND more downside risk than XMSR (attributable to its relative valuation premium). "

Labels: bank of america, jacoby, merger, xm

1/16/2007 08:40:00 AM

SSG Has Merged. You Can Read All Of The Latest SSG Content By Clicking Here

5 Comments:

I have to commend SSG for now allowing comments. However your still a biased rag. Jacoby clearly stated he still prefers XM over Sirius. That little tidbit was left out. Not that XM is better. Not to say Jacoby has a clue. Its just really annoying when a blog like SSG does not post the full story and all comments. Its blatently biased.
By Anonymous, at January 16, 2007 9:36 AM

Jeff,

There were three analyst reports issued this morning. We publisheed the "cliff note" version of the lead on each report. Subsequent to that we followed up each post with the bullet points which outlines the analysts opinion. If you refer to each of the notes as compared to about 1 hour ago you will see that we have updated BOA, Credit Suisse, and both JP Morgan notes. We have published far more of these notes than other sources, but somehow you call us a "biased rag". While we appreciate your readership, we do not share your opinion, and think you will find that we covered todays analyst reports in more depth than any other source. Additionally, our coverage of these reports was absent of opinion, and any bias you may see in them would be the analyst who authored the reports.
By SSG, at January 16, 2007 10:19 AM

whats interesting here and proof in point of my opinion of your "Bisaed Rag" is that I red the entire analist note a full 2 hours before. Just the fac tthat it was posted here on SSG in a partial form shows a bias. This is nothing more than the "bashers on any message board pointing out anything negative. Sure its true. But to ignore the full story is nearly identical to lieing about it. Wouls SSG like examples? Go look ant anything refering to Mel purchacing Sirius stock. No place does it mention e was also issued aproximatly 4X that amount in Option or the Fact that his contract specifically states that any stock options granted will also come with a cash amount equivelent to the tax burden of said options. Although it was really nice to see the purchace on the open market of the 1 million shares. The fact that Sirius gave Mel the money to purchace them gets Ignored. Same thing with posting a partial report. Its like saying that the leader responsable for the Autobahn was a great thinker and visionary. Bottom line is that SSG is not a Yahoo message board where anyone can post anything thats Opinion. SSG is publishing themselves and has a responsability to be as unbiased as possable and as complete as possable and SSG just does not do that.
By Anonymous, at January 16, 2007 12:20 PM

Jeff,

I can appreciate your opinion, and stated such. The comments section here is not a general forum, but a section where you can share your opinions on subject matter.

We clearly published the "cliff note paragraph" at 8:40 AM, and also had 3 other reports to get on the site in as timely a manner as we could. Upon getting the initial stories up on the site we went back to each report and generated the bullet points for the BOA, Credit Suisse, and both JP Morgan reports. By the time I finished doing all of that editing, I responded to your original comment which you posted at 9:36 AM. All of my editing was complete by 10:00 (about 1 hour and 20 minutes after the initial posting. In that time period we did the following:

1. Got the headline paragraph edited published.

2. Inserted labels into the template for reader reference

3. Read 4 analyst reports

4. pulled the bullet points from the reports.

5. Entered and edited the bullet points.

6. republished all 4 stories with lead paragraph inclusive of bullet points.

7. Published your "SSG is a Rag" comment

8. Published a response to your comment.

Please forgive us for trying to get so much done in such a short timeframe.
By SSG, at January 16, 2007 12:42 PM

we at first decided not to respond to some of the statements made by Jeff, but in review of his critisism about accuracy and completeness, we have no choice but to respond.

jeff stated that sirius paid for the shares that mel K purchased this year.

This year mel k bougt 2,000,000 shares out of his own pocket and from his own funds. yes, Mel has options to buy shares, but the 2,000,000 shares he bought earlier this year were from his own pocket.

With that in mind, the appropriate story and coverage would be to report that Mel bought shares, plain and simple.

lastly, you state, "Its like saying that the leader responsable for the Autobahn was a great thinker and visionary."

We fail to see what this well known roadway has to do with satellite radio
By SSG, at January 16, 2007 6:28 PM

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BOA's Jacoby Cuts Rating On XM

1/16/2007 08:40:00 AM

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