Friday, March 02, 2007

Merger Talk In Tomorrow's Barrons

Satellite Radio: Best Merger Play Might Be XM and Sirius Bonds
Posted by Eric Savitz, Mar 2, Barrons

UBS stock analyst Lucas Binder and bond analyst AnnMarie Greene teamed up today to look at the various choices investors have for playing the proposed merger between XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI). As we move further away from the original announcement of the deal, investors conviction that the deal can be completed is slipping - and so are the shares. Binder and Greene write that they view the probability of completion at about 50%; very handy, since that allow you to use the handy coin-flip method to decide which way to lean.
Anyway, If the merger is completed, the analysts write, the highest return should come from XM shares. Binder sees XM shares offering a nearly 41% return if the deal closes, or about twice the expected 20.5% return for Sirius shares. (Those returns are based on several assumptions: that there are synergies available from the deal with a net present value of $3 billion; that the two companies will benefit equally; and that the value of those synergies is not fully reflected in the current stock prices.)
That said, the analysts find that the highest probability weighted returns can now be had from the 9.75% XM senior notes, or the 9.625% Sirius senior notes. “In comparison to the XMSR equity…the bonds offer a higher probability weighted return” assuming a one-year time horizon and a 50% probability the deal closes. “In comparison to SIRI equity…the bonds offer the same return, but theoretically less risk given contractual seniority.” On the other hand, they say that “for investors that disagree with our probability estimate and believe the merger probability is very high, the XMSR equity will look very attractive, which may offer the most upside in the event of a merger.”...read more: here

3/02/2007 06:31:00 PM

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