Tuesday, February 20, 2007

Stanford Group on Merger

February 20, 2007

Report excerpts:

SIRI: Serious regulatory battle ahead.

• We are adjusting our target on Buy rated Sirius SatelliteRadio target back to $5 from $6 because the estimated merger synergies of $1.50 per share are further off and will be harder to uncover than we realized.

• While a satellite radio merger makes tremendous sense given that both companies have invested heavily in content in an effort to tap into the consumer mass market while competing in an increasingly competitive media marketplace, it may take nine months hear from regulators and some time beyond that to start unlocking merger synergies.

• The merger will face significant regulatory scrutiny from the Federal Communications Commission and the Department of Justice. Stanford policy analyst Paul Gallant believes there is a 60% chance the DOJ will sue to block the merger. The transaction is slated to close by year end.

• Analysts have estimated the present value of merger synergies stands between $3-7 billion. The midpoint represents roughly $1.50 per SIRI share of value creation to the combined enterprise. The combine company will control roughly 14 million subscribers producing $2 billion of annual revenue.

• The shares of Sirius had a much more muted reaction to the merger announcement this morning than we anticipated perhaps because the realization of the synergies is so far off and because of the uncertainty of getting regulatory approval.

• Sirius trades at 7x estimated 2007 revenue of almost $1 billion and $800 per our 2007 subscriber estimate of 8.7 million. Our price target returns to $5 to reflect a more serious discounting of the merger and its potential synergies. We rate Sirius Satellite Radio a Buy.

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2/20/2007 09:20:00 PM

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