Friday, January 12, 2007

RBC Capital Martkets Comments on Sirius XM Merger Issue

January 12, 2007

Merger is the buzzword of satellite radio. With very little coming out of CES, and an as yet silent auto show, the driving force right now seems to be a merger. This will change in the coming weeks as the companies get ready to disclose operating results. If the auto shows remain silent, merger speculation will rule the press for this sector.

Latest Research from David Bank - RBC Capital Markets

Broadcasting & Cable TV:

XMSR and SIRI Should Act On Urge To Merge...NowWe Believe An XMSR/SIRI Merger Is Desirable And Feasible

- A Merger Between XM And Sirius Appears Both Desirable And Feasible-Given anemic retail channel growth, we believe managements at both companies now recognize longer-term operating leverage from a potential combination is key to generating long-term shareholder value. We also believe the current regulatory framework could allow for a combination, though not without major resistance.

- We Believe The NPV Of Potential Synergies In A Merger Could Be $5-$6bn-While potential synergies abound, some of the most powerful ones won't likely materialize until longer-term OEMs (who won't have two entities to play off each other anymore) contracts expire. While back office, retail incentives and advertising savings are possible near-term, only advertising synergies will likely drive savings by same order of magnitude as OEM and content savings. Also, given 2-3 year OEM planning cycle, XM/SIRI would probably need to maintain separate operating platforms for 24 months post-deal.

- Given Subscriber Base Size Differentials, We Believe XM Would Need to Be The Acquirer, Rather Than A Merger Of Equal Partner-Given XM's 7.6mm subscribers versus SIRI's 6.0mm at 12/31/2006, we believe XM's shareholders would need XMSR valuation at some premium to SIRI on enterprise value. For illustrative purposes, we assume 10% premium. We estimate $8.44/ $1.59 per share of respective synergies attributable to XM/SIRI .

- Approval Would Likely Hinge On Market Definition-Our sources indicate under current composition and political backdrop, the FCC would likely defer decision to grant or deny regulatory approval for such a transaction to the DOJ (though FCC would likely impose qualifying conditions). There are two potential avenues for DOJ regulatory approval. We believe the first, a failing company allowance (without the merger, neither company would be viable), seems unlikely. The second, the argument that market definition for subscription radio services includes competition beyond the merged entity, appears feasible, in our view.

- We Believe DOJ Would Likely Approve A Transaction Given Current Political Backdrop-The DOJ tends to frame competitive assessments around expected environment over the following 12-24 months, rather than the present. We believe that far out, regulators could envision an audio entertainment landscape defined by content distributed over a) cell phones, b) OEM integrated iPods (or a combination of the two in the iPhone), and c) WiMax.

- But Clock Is Ticking-We believe a Democratic helmed FCC (if a Democrat should be elected President) or even a less receptive Republican helmed FCC (expected potentially under McCain administration) could offer much greater resistance than the current regulatory framework. So we believe XM and Sirius need to act before risking the shift to a less favorable regulatory environment.

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Labels: merger, rbc, sirius, xm