Tuesday, February 20, 2007

Morgan Joseph On Merger

February 20, 2007

Report Excerpts:

XM's Machiavellian Play?
Investment Highlights:

Merger likely to be considered but we doubt it will pass. Yesterday, XM and Sirius announced they had agreed to merge in an equal transaction that would give shareholders of each company 50% ownership of the combined entity. Under the terms of the deal, XM shareholders would receive 4.6 shares of SIRI stock for each one of their shares, for a total value of approximately $17/share (or a 21.6% premium to XM's closing price of $13.98 last Friday). We maintain our
view that even if the deal is considered, significant regulatory obstacles will ultimately prevent approval. We reiterate our Hold ratings on both XM and Sirius.

Deal logistics favor cost synergies. Under the proposal, Mel Karmazin would retain his position as CEO while Gary Parsons would become Chairman. The companies plan to use both satellite portfolios and create a radio product capable of accessing the combined content range. While we believe the merger would lead to tremendous cost savingsand improve the combined company's pricing power as the only satellite radio player in the industry, we note the anti-trust concerns related to potential price increases. While the companies maintain they do not have pricing flexibility, we highlight the 30% price increases XM successfully implemented two years ago, which did not prevent solid net adds or lead to increases in churn.

Timing of events. The companies plan to file the merger agreement ina form 8K this Friday. Once filed, there is a 20-day window during which a Hart-Scott-Rodino must be submitted to the Department of Justice (DOJ), which will trigger debate over approval from the anti-trust standpoint. If approved, the merger will gain anti-trust clearance from the DOJ; from there, the companies have 25 days to submit an application to the FCC (Federal Communications
Commission), which will ultimately determine whether or not the anti-merger provision will be amended. In the end, merger approval will depend on approval from the five FCC Commissioners.

XM's Machiavellian play? If the deal does not gain approval, Sirius must pay a $175mm breakup fee to XM. We note the potential for the fee payment to injure Sirius. In addition, it could hamper the company's operating results in the near-term, given potential management
distraction and related lobbying fees.

This last excerpt seems to not allign with the statements made at the joint conference today. the $175 million "break-up fee" applies to both boards. If either board votes down a merger that company would owe the other $175 million.

Labels: merger, morgan joseph, sirius, xm