Deutsche Bank On SDARS

April 25, 2007

Deutsche Bank - Equity Research


Trimming TPs on lower 2008 ests, but keeping Buys and merger ests

We continue to see the prospect of a merger as a fairly good proposition, and believe that pro forma synergies of close to $400m per year are reasonable. We maintain our 1Q net sub addition estimate of 214k for XMSR, while fine-tuning our SIRI 1Q estimate to 400k from 420k. Retail category trends down 30-40% YTD make us more cautious on our 2008 retail category growth estimate, which we lower to 3% from 8%. We rate both SIRI and XMSR Buys as plays on economical growth in satellite radio, in particular in U.S.
vehicles.

Retail is weak, but in line with our expectations

We believe the satellite radio retail category is tracking down roughly 35% YTD. Coming out of 4Q reporting, we only expected 214k net subscriber additions for XM (down 62% YoY), and actually believe the company should beat this number. While Sirius is more dependent on retail for growth, we believe that strong growth in installations at Ford is largely making up for slack at retail.

Still see merger deal as possible proposition, with synergies of about $4.6bn

In our discussions, arbitrageurs and investors continue to view the antitrust analysis for the merger as complicated, and we agree (see the prior, extensive discussion in our noted dated January 31, 2007 titled "After further review ... still not counting on a merger.") We hear chances of approval in our conversations ranging from 25%- 75%, which frankly seem above the probability implied by current prices. We are fairly comfortable with our synergy estimate, which includes some estimated reductions in programming costs, although we assume no reductions in music royalties or marquee programming rights deals.

Fine-tuning TPs: to $18 from $22 for XMSR, and to $4.75 from $5.25 for SIRI

While our 2007 operating estimates are essentially unchanged, we are lowering our 2008 estimates to reflect 1) essentially no retail market growth in 2008, partially offset by 2) higher installation rate assumptions for the some of the key OEM partners of both companies. Absent a merger, we believe that the retail market in 2008 will benefit primarily from the indirect impact of more OEM subscribers, who may decide to subscribe to additional units once they have used the product. This will have to offset the drags from increasing penetration of the core customer base and increasing competition from other audio music devices. Our XMSR DCF assumes 14.5m XMSR subs by 2010, 30.1m by 2020, a 4% TVG and 14% WACC (resulting in c.$13 per share standalone value) and merger analysis assuming $4.6bn in synergies and a 50% probability of deal completion with few material conditions. Our SIRI target price is based on a DCF assuming 14.1m Sirius subs by 2010, 28.1m by 2020, a 4% TVG and 14% WACC (resulting in c.$4.25 per share standalone value) and merger analysis assuming $4.6bn in synergies and 50% probability of deal completion with few material conditions. Risks to both ratings include changing market for technology-driven businesses, subscriber growth volatility, competing
technologies, rising costs, liquidity, and adverse legal developments (including failure to gain merger approval).

4/25/2007 12:54:00 PM

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