Tuesday, February 20, 2007

Goldman Sachs On Merger

February 20, 2007

Report Excerpts:

XM and Sirius merger announcement arrives…now what?

News XM Satellite Radio and Sirius Satellite Radio announced a definitive agreement to combine in a proposed $13 billion merger of equals. The deal is structured to be tax-free and all-stock that the companies believe can close by year-end 2007.


Last week, our detailed report “Conundrum squared: Why XM and Sirius should wait” (2/11/07) walked through our thoughts on a potential merger. The key question now pertains
to approval chances and consequent share price reactions. In our view, merging platforms could
deliver significant operational, financial, and strategic benefits, likely exceeding $4 billion, though mostly years away. That said, we continue to believe that that the merger is unlikely to pass muster with the FCC, DOJ, and investors, assuming current terms. Finally, we caution that
some investors might view the emergence of the merger proposal as a lack of confidence in the
fundamental business outlook as stand-alone competitors.


The 18% EV discount XMSR trades at relative to SIRI should be cut by 2/3 upon the open.
Assuming SIRI shares trade toward $4 implies $18.40 per XMSR share, less an estimated net 5%- 6% arb discount (10%-12% gross spread less rebate) yields XMSR shares around $17.40, or a 24% increase from Friday's close. This is close to the almost 22% premium assigned to XMSR shares via the proposed 4.6:1 fixed-exchange ratio. We think XM's shareholders are likely to approve the transaction, given the likely lower valuation in the absence of a deal. That said, we question whether the fixed-exchange ratio represents the best possible deal should Sirius' retail sub growth falter and reported churn begin to reflect XM's all-in churn figure in 2007.


Our probability-weighted, DCF-based 12-month price targets are now $15.30 for XM (Neutral), up from $15, and $2.75 for Sirius (Sell), implying an improved exchange ratio. Risks include subscriber trends, execution, or merger approvals.

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2/20/2007 09:39:00 PM

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