Wednesday, April 04, 2007

Stifel On Merger

April 4, 2007

Kit Springs offered the following in a report today.

Still See 55%-60% Probability of Merger; Things Aren't That Bad Absent a Merger

With another recent ~21% pullback in SIRI and XMSR since their merger announcement, we believe the shares offer an excellent risk/reward.

We continue to see a 55%-60% probability of merger approval and believe that recent NAB opposition highlights that terrestrial radio may be considered competition by the DOJ.

Recent weak February retail NPD data were in line with expectations, thus we see no reason to adjust subscriber estimates from a month ago. We continue to see subscriber growth of 34% for SIRI and 15% for XMSR in 2007.

Business models are not broken if OEMs ramp up penetration, in our view. While iPod jacks in cars, instead of satellite radio, is a likely risk, we continue to believe that satellite radio will utlimately be standard - similar to the ramp-up of CD players in cars.

Balance sheets are in pretty good order, in our view, with cash, borrowing capacity, and debt carve-out provisions.

Potential for positive catalysts:

1) merger could be unexpectedly approved by DOJ in late summer

2) comparisons in retail channel get materially easier by 2Q

3) a large OEM could commit to going standard, similar to several small operators.

What could go wrong:

1) XMSR's 2007 subscriber guidance is likely too high (we are at 8.77MM vs guidance of 9.0-9.2MM)

2) weak retail sales could be a leading indicator for rising churn or lower OEM conversion,

3) OEM's could stop at 40% instead of moving toward standard,

4) a merger could be denied, though we think that is already expected.

We find SIRI (Buy - $3.09) a better value on a stand-alone basis. We are maintaining our $18 target on XMSR (Buy - $12.14) based on a 5-year DCF value of $14.50, plus $3.50 merger option and $5 target on SIRI based on a stand-alone DCF.

Pullback offers an attractive buying opportunity: SIRI and XMSR are down 20% and 21%, respectively, since the proposed merger announcement, versus the S&P 2%. Other than stock market weakness/consumer spending concerns, we have seen no new data points that change our outlook on either the merger or a stand-alone basis. Our target prices remain $5 for SIRI (based on a 5-year DCF or 16x 2012 FCF discounted at 13%) and $18 for XMSR, based on a 5-year DCF, which assumes a 10x terminal multiple on EV/FCF and EV/EBITDA and a 10.3% WACC, plus option value of a merger of $3.50. A merger completion in which XMSR received 58% of the $5B of merger synergies would result in a $23 target, all else being equal.

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4/04/2007 10:45:00 PM

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