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

Highlights

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

Labels: bernstein, sirius, xm