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.

Labels: kit springs, merger, sirius, stifel, xm

4/04/2007 10:45:00 PM

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

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SSG is not a Financial Advisor. Read Disclosure: HERE

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Tuesday, January 23, 2007

Kit Springs Weighs In on XM Law Suit and Merger

January 23, 2007

Stifel analyst Kit Spring has issued a note on XM Satellite Radio in reference to the RIIA suit. Springs doubts that the suit will have a negative impact on the enterprise value of XM.

Report Excerpts:

- XMSR lost round one as a defendant in a lawsuit by the recording industry: Last May, the recording industry (RIAA) filed a lawsuit against XM alleging copyright infringements, essentially saying new radios with recording functions are like iPods, which require a higher licensing fee. XM believes these devices are legal based on the Audio Home Recording Act of 1992, similar to TiVo. The RIAA seeks $150k per song or $35B - 5 times the enterprise value of XMSR, an amount that seems completely divorced from economic reality. Last Friday, judge Deborah Batts ruled against XM's dismissal request. She will hear the case. See our Stifel regulatory team's note this a.m. for more detail

Springs sates, "We doubt the liability will be material to XMSR's enterprise value for
the following reasons::

- Based on our analysis of NPD data and other retail channels, these devices haven't been very popular. To date, we estimate XM has sold only about 125k radios (vs.7.7MM subs) with the advanced recording features in question (Pioneer Inno and Samsung Helix allow for disaggregation of shadow recoding).

- Unlike an iPod, you can't take songs off these devices, so maximum economic damage is likely limited to both the number of devices and the average useful life of the devices, perhaps 3.5 years. These qualities lead to enormous differences in the economic damage relative to Internet file sharing, which has a viral/exponential effect. We'd also point out that the number of songs downloaded on iTunes per iPod is only about 20, another statistic that points to limited economic damage.

- Sirius negotiated separate licenses with the record companies for their recording capabilities, which we believe were around $9 per radio upon manufacture for recording consistent with the AHRA and$25 per radio (incremental $16) for advanced recording features. Sirius was the
manufacturer of its advanced recording radios. We believe XM/Pioneer/Samsung are paying only the$9. If XM settled for 5 times what Sirius is paying, that equates to damages of $10MM, an immaterial amount, in our view

- In our view, the RIAA is incentivized to improve its economics versus XM, but at the same time not to materially harm the company. Satellite radio pays a total of7% of its revenues to record companies and artists combined, versus3% from terrestrial radio. So, record companies should prefer that satellite radio takes off, unless they conclude that radio in general (both satellite and terrestrial) is bad for record sales.

- Advanced recording will likely remain a niche product until manufacturing costs plummet: Looked at another way, we believe an incremental $16 fee for future radios with advanced recording features would be a slight detriment to adoption if manufacturers tried to pass all of the cost to consumers. If XM had to bear the full cost of advanced recording, as opposed to sharing it with manufacturers and/or consumers, this would represent a reduction to the economics per sub with advance recording features. If XM wanted advanced recording for every radio and fully subsidized it, we estimate this would cost XM an incremental $25 in SAC/CPGA (42%/25% increase). We doubt that XM will need to do this because competing technologies will also be restricted in terms of what they can offer. We believe that advanced recording features will remain a niche product for consumers that want to pay the extra $9-25, until manufacturing costs plummet. We do not belive the Street has baked in high assumptions for recording products.

Maintain Buy rating on XMSR: We continue to believe long-term forecasts for satellite radio are achievable based on the projected ramp of new car installations (from about 20% of new cars today to70% by decade end) and relatively high-take rates in new cars today (55%). We think SIRI and XMSR will attempt a merger in 2007 and see $7B of merger synergies. Of course, there is also a possibility that no merger occurs. Our $18 target is derived from a DCF, which assumes 9x 2011 EBITDA and a 10.5% WACC.

Labels: kit springs, merger, riaa, stifel, xm