Tuesday, January 16, 2007

Credit Suisse Comments Satellite Radio

January 16, 2007

Report Excerpts:

- Stocks Offer Favorable Risk/Reward: We have revised our scenario analysis, assigning equal probabilities to our Bull, Bear, and Base Cases. As a result, we have increased our 12-month target price on XMSR to $23 (34% upside), and decreased our SIRI target price to $5 (22% upside). We believe that XM offers more upside than Sirius as a result of its higher OEM exposure, which should increase over time as Sirius partners Ford and Chrysler lose share to Japanese manufacturers aligned with XM.

- Updated Merger Model: We have updated our proforma merger model (originally published in September 2006) to incorporate our revised forecasts for the standalone entities. We estimate the NPV of synergies would be $10.5B. With a 50% arbitrage spread (reflecting regulatory risk) in a merger of equals this would imply a $25 stock price for XMSR and $5.40 for SIRI.

- Demand Forecast More OEM Centric: We project industry gross adds to increase 31% in 2007, comprised of a 43% increase in OEM channel gross adds and a 10% decline in retail gross adds. We project total churn to increase 20 BP over 2006 due to the impact of OEM non-conversion affecting a greater percentage of the subscriber mix. This translates into a 7% decline in industry net adds - an 11% decline for Sirius and flat vs 2006 for XMSR. 2007 will mark the first year that OEM gross and net additions exceed retail. The key changes to our long term subscriber forecast are more conservative retail demand, a more optimistic OEM gross add forecast, and lower OEM conversion rates as installation rates increase. Underlying demand and customer satisfaction with satellite radio are strong; the key barrier to adoption is trial, which should improve with increased consumer awareness and OEM installation rates."

-ARPU Growth Is An Opportunity: We forecast both companies to begin to implement price increases at some level during 2008. We believe that XM and Sirius have pricing power and are likely to exercise it in the future as they become less reliant on the retail channel for growth.

- SAC/CPGA Should Be Stable: We expect SAC at XMSR to be relatively flat in 2007 at $68, and down 24% for Sirius at $86. Sirius' SAC is continuing to benefit from the implementation of newer chipsets in its equipment

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1/16/2007 09:59:00 AM

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