BOA's Jacoby Weighs In
April 23, 2007
Jonathan Jacoby published a 1Q Preview note lowering price targets, highlights below:Satellite Radio 1Q07 PreviewKey Inputs Point to Lower Fair Value for Both XMSR and SIRI
Despite the recent sharp decline in share prices, we maintain our neutral ratings on XMSR and SIRI – standalone values and merger synergy values likely are lower than previously estimated. Given the proposed merger, the fair value of XMSR and SIRI consists of fair value as a standalone entity plus the expected value of merger synergies. In our view, BOTH components are worth less than we had previously estimated.
1) Lowering our stand-alone estimates due to lower longer-term conversion rate assumptions. New standalone value estimates are $2.25 (from $2.50) for SIRI and $10.50 (from $13.50) for XMSR. We have scrubbed our valuation models for both companies. The principal adjustment was to reduce our longer-term OEM conversion rate estimates for XM to make them more consistent with our longer- term assumptions for Sirius (i.e., 40-45%). Our previous model assumed that conversion rates bottomed at 50% in 2H07. The adjustment to OEM churn shaves ~500K subscribers off of our 2010 year-end estimate.
2) Lowering our merger synergy assumption to $3.6B from $5B – sports rights fees could increase initially under the base scenario. Our prior analysis assumed that combined programming and content expenses would be reduced by 15% in ’08 and by 25% in ’10 and thereafter. However, in order to be able to offer baseball or football to subscribers of both satellite networks, the merged entity might need to increase the current payments and/or extend the agreements. Our model now assumes that there are no net programming cost savings as lower costs for certain programming (e.g., music and talk channels) could be offset by higher sports rights fees.
The current stock prices seem to suggest that the probability of regulatory approval of the merger is roughly 35-40% - but our FCC contacts believe that the percentage is trending lower. Assuming that our new fair value estimates for XMSR and SIRI with or without a merger are roughly correct, we estimate that the market implied probability of obtaining regulatory approval for the merger from the DOJ and FCC is between 25% and 40%.
On a positive note, we see little downside risk to our 1Q07 (and 2007) subscriber estimates. In fact, we believe that XM should beat our net add estimate of 242K (consensus is 334K – we believed that 290K is reasonable). We expect Sirius to meet or beat our net add estimate of 461K (consensus is for net additions of 497K). XM and Sirius will report 1Q07 results on April 26th and May 1st, respectively.
Our new price targets are $2.75 for SIRI and $12.50 for XMSR. Given a smaller synergy value estimate and lower standalone value estimate for each company, we estimate that SIRI would be worth ~$3.50 and that XMSR would be worth ~$15.50 if the merger is approved. Our new price targets are $2.75 for SIRI (from $3.50) and $12.50 for XMSR (from $17) – our new targets assume a 40% probability of the proposed merger receiving the necessary regulatory approvals.
Sector View: Audience erosion will continue to cap top-line growth over the next decade, whether radio "goes Google" or not
Labels: bank of america, jacoby, merger, q1 2007, sirius, xm
4/23/2007 10:04:00 AM
SSG Has Merged. You Can Read All Of The Latest SSG Content By Clicking Here
Has the sentiment gotten negative enough for the stocks to bounce? Or do they need to go to zero? Anyone holding these stocks is a fool, including me. Is anyone positive on the stocks in the analyst world that you could put on this site? It seems the only positve people on the stocks is your SSG responses to all the negative articles. Don't you feel outnumbered?
By April 23, 2007 11:30 AM
Sentiment in this secor has been down for quite some time. What people need to do is ask themselves whether or not they feel satellite radio is a viable medium that will gather listeners. If you feel that this is the case, you then look at the sector and make a determination as to whether they can do it in a profitable way (either with or without a merger)
By SSG, at April 23, 2007 11:38 AM
One problem we see today is that people want instantanious results. SDARS canb not proivide that in terms of an investment. These companies have had huge capital expenditures to build these businesses. Some were required (satellites, repeaters, etc.), some were optional (content deals, exclusive deals, etc).
The question comes down to when these companies can make a profit. Most anaylysts do not see that happening for at least another year. Investors need to keep the big picyure in mind, and see whether that big picture fits into their portfolio today.
I used to feel that the big picture was bright for these stocks and companies, and I understood the stocks might take awhile to go up. It seems there is know too much competion now and I have lost way too much money waiting. I also feel they are caught in a political game and also a situation like Overstock.com, where it has become very profitable to downgrade and then short these stocks. Unfortunately, I am like a deer in the headlight situation and am frozen. I keep waiting for something good to happen, but as of yet it has not.
By April 23, 2007 11:58 AM
SSG is not a Financial Advisor. Read Disclosure: HERE