Wednesday, February 28, 2007

Bank Of America Report

February 28, 2007

Sirius Satellite Radio Inc. The Underlying Fundamentals for Sat Radio Aren’t Getting Strongerand the Merger Could Be Blocked – We Remain Neutral on SIRI

For 4Q06, key metrics were mixed in relation to our forecast.

Subscriber churn of 2.0% was 20bp higher than our 1.8% estimate due to higher OEM promo churn. Cash metrics were slightly better thanexpected. The “cash” EBITDA loss of $167M was $8M better thanour estimate. FCF was $29M (vs. our $22M estimate).

Guidance for 2007 is slightly worse than our prior forecast –

churn guidance suggests that Sirius’ OEM conversion rates are running 35-40%. We have revised our year-end ’07 subscriber estimate to8.0M from 8.2M. Management expects total subscriber churn of 2.2-2.4% in ’07, up from 1.9% in ‘06. It now appears to us that the OEM conversion rate is trending around the 35-40% range. If Sirius is unable to boost this rate, it potentially could indicate that satellite radio’s demand issues extend beyond the retail channel.

We reduced our ’07 “cash” EBITDA estimate based onmanagement guidance for revenue and SAC –

positive FCF could be as far out as ‘09. Our new “cash” EBITDA loss estimate of $263Mis $58M below our prior estimate. Investment thoughts – we remain Neutral on SIRI and believe that without a deal SIRI’s stock is worth $2.50. We believe there is a less than 50% chance that the merger is approved by regulators, and as a standalone entity we believe that SIRI shares are worth $2.50. The churn increase forecast for ’07 could be indicative of poor OEM conversion rates and suggests downside risk to our fair value estimates.

Valuation and Target Price Analysis:

Our $3.50 TP is based on tax-adjusted DCF and the probability that the merger is completed

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2/28/2007 05:55:00 PM

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