Wednesday, February 28, 2007

Deutsche Bank On Sirius

February 28, 2007

Maintain $5.25 12-month TP, as pending merger a cushion for slower growth Management's YE2007 guidance of 8m+ was lower than our 8.2m estimate, although cost expectations (ex-merger) were in line. Mgt's view that the retail category may not grow until 2H are no surprise given down 40%+ trends YTD against tough comps. 2007 churn guidance of 2.2%-2.4% was ahead of our 2.1% estimate, and suggests that OEM net sub add growth could slow a bit from 2006 as well. We rate Sirius as a Buy on economical growth in the U.S. satellite radio market, in particular in vehicles.

Retail’s 54% mkt share drove 4Q growth, although $103 SAC slightly missedRetail/rental net sub additions were 556k, ahead of our 545k estimate, while OEMnet adds of 349k were below our previous 360k est. Avg monthly churn was 2.0%, above our 1.8% estimate, reflecting some increase in roll off of bundledplans. SAC per gross add was a bit higher than our $100 estimate.

Pending merger, no 07 FCF guidance-our loss est goes to $165m from $238m Sirius’s full-year guidance of “approaching” $1bn in revenue and c$95 per grosssub add were in line with our estimates of $957m and $96, respectively. Management said that it expected to substantially reduce its adj. op. loss and FCFloss from 2006 levels of $513m and $501mm, respectively. We are boostingsome of our fixed cost estimates, notably programming and G&A, so that positiveFCF is pushed to 2009 in our model (we expect satellite capex in 2008).

Buy rating reflects 12-mo TP of $5.25 and 50% change of merger approvalOur target price is based on a DCF assuming 14.5m Sirius subs by 2010, 27m by2020, a 4% TVG and 14% WACC and merger analysis assuming $5bn in synergiesand 50% probability of deal completion with few material conditions. Risks includechanging market for technology-driven businesses, subscriber growth volatility,competing technologies, rising costs, adverse legal or regulatory developments(including failure to gain merger approval).

Labels: deutsche bank, sirius

2/28/2007 12:56:00 PM

SSG Has Merged. You Can Read All Of The Latest SSG Content By Clicking Here

0 comments

SSG is not a Financial Advisor. Read Disclosure: HERE

--------------------------------------------------------

Wednesday, February 14, 2007

XM Completes Sale/Leaseback Transaction On XM-4

February 14, 2007

Last week we reported that there was speculation regarding a sale/leaseback of XM-4. The note was part of an analyst report written by James Dix of Deutsche Bank, who broke the story to the street. Today, XM announced that they have completed the transaction. The move will bolster liquidity for XM.

On February 13, 2007, we entered into a sale-leaseback transaction with respect to the transponders on our XM-4 satellite, which was launched in October 2006 and placed into service during December 2006. This transaction was the result of months of extensive negotiations and preparation, and follows the receipt of the XM-4 in-orbit test reports in January and the placement last week of additional insurance on the XM-4 satellite required in connection with the transaction. XM received net proceeds of $288.5 million from the transaction, of which $44 million (inclusive of interest) was used to retire outstanding mortgages on our real property and the remainder of which provides additional liquidity available for working capital and general corporate purposes.

The transaction achieved our dual objectives of monetizing the tax benefits of XM-4 satellite ownership and cost-effectively enhancing our liquidity. The sale-leaseback transaction completes the recapitalization plan which we commenced in April of last year and was specifically provided for in the bond and credit facility agreements closed in May 2006.

Summary of the Transaction. Under the sale-leaseback arrangement, we sold the XM-4 transponders to a trust owned by Satellite Leasing (702-4) LLC for $288.5 million, representing the fair market value based on an appraisal performed by satellite consulting and lease appraisal firms. The purchase price for the XM-4 transponders was financed with a $57.7 million investment by the equity owner of the lessor, or owner participant, and $230.8 million from the sale of 10% senior secured notes by the lessor.

The lease term is nine years with an early buy-out option in year five and a buy-out option at the end of the term. The lease has minimal amortization during the first half of the lease term and will be recorded as a capital lease on our balance sheet.

Our operating subsidiary, XM Satellite Radio Inc., is leasing the transponders from the lessor for a term of nine years pursuant to a lease agreement. These lease payment obligations, which are unconditional and guaranteed by the parent company, XM Satellite Radio Holdings Inc., are senior unsecured obligations and rank equally in right of payment with existing and future senior unsecured obligations. Principal and interest payments on the notes are senior secured obligations of the lessor. The notes issued by the lessor are secured by a lien on the transponders, the lessor’s security interest in the XM-4 satellite, and subject to certain exceptions, the rights of the lessor under the lease, including the rights to receive base rent and other amounts payable by us under the lease.

Throughout the term of the lease, at any time when XM is not investment grade, we will provide to the owner participant credit support sufficient to cover the stipulated loss value of the equity at that time. To provide this credit support at the present time, we defeased the existing mortgages on our headquarters and data center properties in Washington, D.C. and put into place new mortgage liens on those properties in favor of the owner participant.

We will have full operational control over the transponders for the lease term, absent default. We will continue to own the XM-4 satellite itself, subject to an obligation to sell the satellite to the lessor for a nominal sum in the event that we do not repurchase the transponders at the end of the term.

We have an early buyout option in year five and a buy-out right at the end of the lease term, each at prices representing the fair market value based on an appraisal performed by satellite consulting and lease appraisal firms. We have other rights to purchase the transponders or the equity interest in the lessor, including if the owner participant becomes affiliated with a major competitor of XM and in situations which might otherwise involve adverse tax or accounting consequences. We also have rights to cause the lessor to effect a refinancing of the notes, and any interest savings from the refinancing would result in reduced lease payments.

We can be required to repurchase the transponders upon the occurrence of specified events, including an event of loss of the satellite (subject to our right to substitute another satellite meeting equivalent or better value and functionality tests), changes in law that impose a material regulatory burden on the owner participant, changes of control similar to those of our outstanding 9.75% Senior Notes due 2014 and events resulting in the absence of another holder (other than XM and its affiliates) of FCC satellite radio licenses in the frequency bands that can be served by the XM-4 satellite. We have agreed to provide indemnities in the event the owner participant shall lose or not be able to take certain tax positions relating to the transaction.

Labels: deutsche bank, sale-leaseback, xm, xm-4

2/14/2007 11:02:00 AM

SSG Has Merged. You Can Read All Of The Latest SSG Content By Clicking Here

4 comments

SSG is not a Financial Advisor. Read Disclosure: HERE

--------------------------------------------------------

Wednesday, January 31, 2007

Deutsche Bank Weighs In On Satellite Radio Merger

January 31, 2007

Just as the buzz around a merger between Sirius and XM seemed to have calmed down a bit, a new report has been issued. This report from James Dix of Deutsche Bank, was quite extensive (40 pages), and details various aspects of a merger including the possibility of it happening and the regulatory hurdles that may be faced.

Report Excerpt:

Audio Signals

Cloudy crystal ball on regulators at this time hurts the risk/reward

Based on our review of the legal landscape and current developments in mobile audio, we conclude that there is a reasonable risk that the regulators would not approve a merger between Sirius and XM, or would approve one only with substantial conditions including potential spectrum divestiture. We continue to recommend investors substantially discount the prospect of a merger, but maintain our Buy ratings based on longer-term fundamentals.

Be quick, but don't hurry

We believe investors may underestimate the practical difficulties the satellite radio companies would face in winning timely regulatory approval. In its order in DirecTV-EchoStar, the FCC repeatedly noted that the merging companies had not met the burden of making their case. If Sirius and XM have to rush to file a merger proposal due to potential changes to the FCC in the 2008 election cycle, they may have less ability to make their own case. We have reviewed the satellite radio license grants, the 2002 FCC ruling in the DirecTV-EchoStar proceeding, and 1997 and 2006 DOJ/FTC guidance on horizontal mergers. We base much of our assessment of the competitive landscape, central to determining the relevant market and competitive impact of a merger, on takeaways from our four days at CES earlier this month and discussions with DB's wireless equipment team.

Keys: defining relevant market and gauging timing/impact of new entrants

While satellite radio faces substantial competition for the consumer's attention and entertainment dollar from a host of products and services that did not exist 10 years ago, such competition by itself might not justify allowing Sirius and XM to merge. Rather, we believe that regulators would focus on the incremental impact on competition in the relevant market from a potential satellite radio merger, and would have to handicap the timing and impact of the rollout of potential new products like HD radio, smart phones, auto consumer electronics, 3G and WiMax.

Will there be a 2007 rate increase?

Sirius' prior public statements on the potential for a rate increase suggest that it does not currently feel substantially constrained even by competition with XM from being able to raise rates. However, we wonder whether the potential for a merger makes it less likely that either company raises rates this year. The ability to increase prices without substantial churn might suggest to the FCC that the relevant market for assessing a merger is satellite radio, not something broader.

Maintain Buy ratings, with 12-month TPs of $20 on XM and $5.75 on Sirius

There are obviously other legal analyses and facts that could determine a regulatory decision in this case than the ones we present here, and we are not offering a legal opinion on what any regulator might decide. We use a DCF through 2020, WACC of 13-14%, and TVG of 4% to support our target prices. Risks to our investment theses and TPs include changing market risk tolerance for tech-driven businesses, subscriber growth volatility, competing technologies, rising costs, deal risk and adverse regulatory developments.

As we here at SSG have expressed before, the definition of the market is a key element for these companies should they decide to attempt a merger. With the advent of new competition from the MP3 market, cell phones with audio capability, HD Radio, and internet radio, it becomes important for Sirius and XM to demonstrate that the marketplace is substantially broader than it was only 6 or 7 years ago.

Labels: deutsche bank, merger, sirius, xm

1/31/2007 09:32:00 AM

SSG Has Merged. You Can Read All Of The Latest SSG Content By Clicking Here

0 comments

SSG is not a Financial Advisor. Read Disclosure: HERE

--------------------------------------------------------

Thursday, January 18, 2007

Deutsche Bank Note - Sirius

January 18, 2007

James Dix from Deutsche Banc Note

James Dix from Deutsche Industry Bulletin Research

- FCC Chairman's comments benign on surface, but hint at real problem At a press conference on Wednesday, in response to a question about the possibility of an XM-Sirius merger, Chairman Martin pointed out that the SDARS license grants prohibit a single entity from owning both the satellite radio licenses.

This would not be an insurmountable hurdle to a deal. The FCC could modify such a prohibition if it thought that a merger were in the public interest. That said, discussions we have had with regulatory experts suggest that the FCC's original commitment to having some competition among the satellite operators may trump arguments (reasonable though they appear to be) that the competitive impact of a merger on the audio market would be not be great, given abundant new media audio options. After all, the FCC previously rejected the DirecTV/Echostar merger despite arguments that satellite TV should not be considered a separate market.

Need for high confidence in approval also weighs against a deal. We estimate that it could take at least 6-9 months for the regulators, chiefly antitrust and the FCC, to pass muster on a proposed transaction. We believe that XM and Sirius would want to be fairly confident of approval before they announced a transaction. Given the prospect of FCC turnover or at least delay if the process extended into 2008, these factors indicate that the satellite radio operators have only a few months to get the necessary comfort on the regulatory front. With opposition likely from the NAB among others, such quick comfort may be hard to come by.

Stocks already near “no-merger” support level, in our view. In line with our note last week (see "Post-CES first takes: is sat rad merger 'musthave' feature?" dated 1/11/07), we hypothesize that, absent a merger, and taking the view that the satellite radio industry's growth might be on a riskier trajectory than believed, we think XM could trade near-term at roughly $15 and SIRI at roughly\n$4. We caution that, post-CES, strong fundamental catalysts may not appear until 2H when the OEM channel starts to accelerate. We note, for example, that the Consumer Electronics Association currently forecasts just 2% retail category growth for satellite radio for 2007. Our 12-month target prices for XMSR and SIRI are $20 and $5.75, respectively. We use a DCF through 2010, WACC of 13%-14%, and TVG of 4% to support our target prices.

Labels: deutsche bank, merger, sirius, xm