Monday, April 23, 2007

Berstein's Craig Moffett On XM and Sirius

April 23, 2007

Craig Moffett of Sanford Bernstein Published a note this morning, highlights below:

XMSR and SIRI: Heads I Win, Tails You Lose. XMSR/SIRI Pair Trade Should Work With or Without a Merger


If a stock falls in the forest, and no one is there to hear it, does it still make a sound?

• That’s the salient question for satellite radio investors…those who are left, that is. Ever since XMSR and SIRI announced their merger on February 19th, the stocks have been in a free-fall. At the same time, trading volume has dropped sharply (down 44% at XM and 14% at Sirius), as investors have traded apathy for pessimism. Since the announcement of the merger, both XMSR and SIRI shares are down some 20%.

• At the center of both declines is the view that the companies’ proposed merger faces dim hopes in Washington, and that – without it – the companies face dim futures in the marketplace. Based on where the stocks are currently trading, we believe the market is assigning only a 11.2% chance that the merger will ultimately be approved

• Even if the merger doesn’t happen, the relative value gap between XM and Sirius remains our preferred way to participate in the sector. XM trades at an 11.7% discount to Sirius, despite being a better positioned company, in our view.

• XM’s strategic position in the OEM channel is better, and is only getting more so. The aggregate share of XM’s OEM partners has grown from 56.0% of the U.S. auto market at the beginning of 2004 to a 59.3% share by the end of 2006, a gain of 340 bps in two years. Last year was a particularly difficult one for Sirius’ OEM partners. Overall U.S. auto sales were down 2.4%, yet they were down 4.6% at Sirius’s partners and only 0.9% at XM’s partners

• On the other hand, if the merger does get approved, the spread between the two equities should expand by 19% versus current levels – based on the fixed 4.6x exchange ratio that Sirius will pay for XMSR shares. Since the merger announcement, the shares have rarely traded above a 4.0x ratio; the spread has remained virtually constant

• Earnings previews and updated models for both XMSR and SIRI appear at the end of this report. XM will report first quarter earnings on Thursday, April 26th at 10:00 AM ET. The dial-in number is (877) 265-5808, pass code 5409333. Sirius will report earnings on Tuesday, May 1st at 8:00 AM ET.

We believe that the relative value gap between XM and Sirius remains the single best way to participate in the sector. We view the 11.7% enterprise value gap between the two companies as unwarranted, and untenable. We are lowering our XMSR (Outperform) target price to $16 from $19 and we are lowering our SIRI (Market-perform) target price to $3.50 from $4.00

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4/23/2007 09:57:00 AM

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