Wednesday, February 28, 2007

Deutsche Bank On Sirius

February 28, 2007

Maintain $5.25 12-month TP, as pending merger a cushion for slower growth Management's YE2007 guidance of 8m+ was lower than our 8.2m estimate, although cost expectations (ex-merger) were in line. Mgt's view that the retail category may not grow until 2H are no surprise given down 40%+ trends YTD against tough comps. 2007 churn guidance of 2.2%-2.4% was ahead of our 2.1% estimate, and suggests that OEM net sub add growth could slow a bit from 2006 as well. We rate Sirius as a Buy on economical growth in the U.S. satellite radio market, in particular in vehicles.

Retail’s 54% mkt share drove 4Q growth, although $103 SAC slightly missedRetail/rental net sub additions were 556k, ahead of our 545k estimate, while OEMnet adds of 349k were below our previous 360k est. Avg monthly churn was 2.0%, above our 1.8% estimate, reflecting some increase in roll off of bundledplans. SAC per gross add was a bit higher than our $100 estimate.

Pending merger, no 07 FCF guidance-our loss est goes to $165m from $238m Sirius’s full-year guidance of “approaching” $1bn in revenue and c$95 per grosssub add were in line with our estimates of $957m and $96, respectively. Management said that it expected to substantially reduce its adj. op. loss and FCFloss from 2006 levels of $513m and $501mm, respectively. We are boostingsome of our fixed cost estimates, notably programming and G&A, so that positiveFCF is pushed to 2009 in our model (we expect satellite capex in 2008).

Buy rating reflects 12-mo TP of $5.25 and 50% change of merger approvalOur target price is based on a DCF assuming 14.5m Sirius subs by 2010, 27m by2020, a 4% TVG and 14% WACC and merger analysis assuming $5bn in synergiesand 50% probability of deal completion with few material conditions. Risks includechanging market for technology-driven businesses, subscriber growth volatility,competing technologies, rising costs, adverse legal or regulatory developments(including failure to gain merger approval).

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