Tuesday, February 06, 2007

Deutsche Bank Comments On Possible satellite Transaction For XM

February 6, 2007

In a note issued today, James Dix of Deutsche Bank spoke of a possible sale and leaseback option for XM's most recently launched satellite XM-4. Dix sees it as a transaction to help liquidity.

Report Excerpt:

Sale-leaseback would affect liquidity, not merger

Looking at possibility of sale-leaseback transaction. Per channel checks, we believe that XM may be pursuing a potential saleleaseback transaction involving the XM-4 satellite it launched late last year. Of course, it may not conclude a deal. Assuming satisfactory terms, we would likely view such a transaction as a modest positive, given its impact on liquidity.

Impact of 2006 sub shortfall on cash is already known

Given that XM finished 2006 with 7.6m subs, vs the 9.0m sub guidance it gave at the beginning of 2006, its sub revenue base for 2007 is roughly $170m less than contemplated at the beginning of 2006. Even after SAC, we estimate the incremental negative impact on year-end 2007 cash could be roughly $100m. Thus, it is not a surprise that the company would be pursuing additional liquidity. The company in fact carved XM-4 out of the security for its financing in the spring of 2006, which would facilitate a saleleaseback transaction now. We estimate the carrying-value of the satellite at $240m, which includes value for the launch vehicle and in-orbit insurance (for 18-24 months, we believe). The launch was good, and thus we estimate XM-4's useful life at this point is at least 15 years.

Do not believe a financing transaction would affect merger odds

We believe the primary implications of such a transaction would be for XM's liquidity, not the prospects for a merger with Sirius. For example, XM-3, launched two years ago, is currently security for line of credit financing. XM's service is now operating using XM-3 and XM-4, with XM-1 and XM-2 powered down and available as spares. That said, we still believe that a completed merger would be a challenge for both companies (see our report "After further review ... still not counting on a merger" dated 1/31/07).

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2/06/2007 11:27:00 PM

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