Friday, February 16, 2007

A Deeper Look At The Bear Stearns Report

February 16, 2007

No Time for Quibbling; 60% of $0 = ZERO

•We think that both XM and Sirius believe a proposed merger could likely pass the regulatory hurdles, which we think would push them to attempt a merger. However, beyond the initial warming public comments made by both companies in early January, the public potential deal talk has slowed, hampering both share prices (XM is down ~25% since its recent highs and Sirius is close to 52 week lows).

•We believe any public progress of making a deal has been slowed by the economics of the exact split in a MergeCo. However, we think that the sheer value proposition of a potential deal for both sets of shareholders vastly overshadows any disappointment in share of MergeCo. Due to a closing window of opportunity (based on how long we think it would comfortably take to close a potential deal), we think investors would implore the boards of both companies to avoid quibbling over a few share points, to capture the much larger value of overall potential synergies. This would maximize shareholder value for both companies.

•We provide a sensitivity of potential value accretion to XM shareholders based on the split of MergeCo which we center around ~55% for XM Radio. We believe both sides would argue a higher percentage in any potential deal, but feel this center point is appropriate given the estimates in our model. Currently, Sirius has >50% of the industry EV, which we think is driven by differences to our model that we outline in this note.

•We think that upon the expectation of a successful deal, the ~$6-7B in synergies would take the value of XM's stock to ~$25, presenting significant upside potential. Hence we think both sets of shareholders would benefit greatly upon a deal. With XM trading at a lower percent of industry EV, we think the stock will Outperform and recommend investors buy pre any potential announcement.

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2/16/2007 10:45:00 AM

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