Analyst Roundup: Sirius and XM in Light of DOJ Merger Approval

Analysts weighed in on Sirius (SIRI) and XM (XMSR) after the DOJ approved the merger deal between the two satellite radio companies. Here are their takes:

1. Stifel analyst Kit Spring

Merger Synergies Underappreciated; Reiterate Buy and $4Target on Sirius, Upgrading to Buy with $18.40 Target on XM

DOJ approved merger; stocks under-reacted: Despite an estimated $4.8B of synergies, XMSR and SIRI shares had a muted impact in our view, indicating either skepticism on the size/timing of the synergies or a view that DOJ approval means there is too much competition. The 5.1% merger spread indicates a healthy degree of skepticism of FCC approval.

FCC approval likely to be next catalyst: We expect the FCC to approve the merger within weeks with impositions that do not materially impact our $4.8B of merger synergies, which already include the concessions of a la-carte pricing, adult tiers, and price freezes. Unlikely surprise impositions that would reduce our synergies would be 1) required inclusions of HD radios (request by iBiquity) - too onerous as XMSR/SIRI does not make radios, and 2) spectrum giveback - unlikely as it would reduce benefits to consumers and adjacent WCS spectrum is still not being used.

Model will improve dramatically post the merger: 1) increases likelihood that satellite radio ends up standard versus our 75% assumption, 2) nearly every expense line item should see dramatic reductions (after initial costs), 3) improved prospects of profitability increase likelihood that $4.5B of combined NOLs can be used.

2. Morgan Stanley

DOJ Approved Proposed Merger: Now that the DOJ approval is in, the FCC vote is all that is remaining. Following closing, the merged entity should benefit from some lift in demand from combined programming offerings – in particular offering all the sports programming and talk radio on a single platform for the first time. In the medium term, we would expect the merged entity to look for cost savings opportunities in programming, overhead, and subscriber acquisition costs. Critical swing factors in investor perception of the merger will include the ability to renegotiate large contracts on the programming and OEM front in addition to stimulating new demand and lowering the OEM conversion ratio.

3. Goldman Sachs

DOJ approval removes a hurdle, for the companies and short-sellers

Source of opportunity:
We are adding SIRI to the Conviction Sell List with 30% potential downside to our unchanged $2.25 12-month price target. With the “DOJ Catalyst” now behind us, we believe the current share price does not reflect (1) a lowered base cash flow outlook; (2) the effect of potential FCC conditions, and, as a result, near-term executable synergies; and (3) possible near-term liquidity hurdles. We think the combination of (1) and (2) increase the risk of significant dilution attached to (3), particularly if it is necessary to refinance the +$1 bn of XM’s putable debt and raise new working capital given the status of the debt markets and continuously declining forward estimates.

Catalyst:
We believe SIRI shares, having closed at $3.15 following the DOJ approval, have likely marked a near-term high, similar to the $3.75 February 2007 peak upon deal announcement. Given a combined $11.5 bn EV and $7 bn of implied synergies, we recommend investors sell SIRI shares to take advantage of likely: (1) continued deterioration of fundamental trends; (2) recognition of potential FCC conditions and integration risks; (3) unfavorable debt refinancing; or (4) de facto FCC rejection of the deal. With the DOJ approval now out of the way, the primary obstacle cited to shorting the stock has also been removed, with the market now more apt to apply a more appropriate valuation relative to the opportunity.

4. Lehman

Investment Conclusion:
The Department of Justice has approved the XMSR/SIRI merger without conditions. We expect the FCC to approve the transaction as well (FCC has never rejected a DOJ-approved merger); timing is unclear, but likely next 2-4 weeks. We believe synergies are material ($3-7BN NPV). Expect stock to be volatile as market awaits final approval, attempts to assess appropriate post-transaction valuation for combined company. Prefer XMSR to SIRI at these levels given that current prices retain 5% deal spread.

Summary:
DOJ has approved the transaction. Approval commentary indicates that DOJ viewed competition in OEM as already limited (due to provider lock-in), and that deal would not materially reduce competition in the retail segment. DOJ expects substantial cost efficiencies from transaction. Long-term, approval notice expects new competitive offerings, particularly wireless broadband, to be material. We expect the FCC to approve the transaction in 2-4 weeks. Remains unclear if any concessions beyond the a la carte pricing the companies have already offered will be required - we do not expect companies to be asked to give up spectrum, as some have requested. We believe deal synergies are large, but back-end loaded. Near term benefits come from reduction in overhead. Medium term cost benefits include lower cost radios driven by scale economics (highlighted by DOJ), lower marketing cost due to lower need to promote inretail market. Long term benefits include lower branded programming costs and lower OEM costs due to improved negotiating leverage -satellite network savings are very long term due to large installed base of single-provider radios.

5. Citi analyst Eileen Furukawa

Sweet Music to Their Collective Ears

Still Need FCC Approval But Likely Clear Sailing From Here — As we’d hoped, after over 1 yr of hard fought work, XMSR & SIRI have finally received approval from the DOJ. While FCC approval is still required, we believe it is highly unlikely FCC approval will not be forthcoming shortly, most likely in April.

Concessions Likely, But Expect Spectrum Is Off the Table — We believe that FCC approval will likely be given only with concessions. We also feel XMSR and SIRI are committed to getting the deal done and thus are amenable to reasonable concessions incl. specific timing requirements around a la carte pricing. But, we currently don’t expect spectrum concessions will be part of the deal.

Continue to Believe $6 to $7 Bn in Synergies Possible — We continue to stand by our prior line-by-line analysis that suggests the combined satellite entity could achieve present value cost savings of $6 to$7Billion with 10-20% savings across customer service, programming G&A, R&D, Sales & Marketing, etc. Further, while we do not assume revenue synergies, a combined XM/SIRI could drive higher ad revenues given larger combined reach. Also, we conservatively did not include cap ex savings from migrating to one system.

6. Cowen analyst Tom Watts

Wedding Bells At Last. DoJ Approves Merger. FCC Approval Expected Soon.

Conclusion: Yesterday, the DoJ approved the XMSR-SIRI merger, setting the stage for an FCC approval in the next few days, and a deal closing should happen immediately thereafter. On its Q4 call, SIRI indicated it would provide combined company guidance for FY08 following closing. We maintain our Outperform rating on both companies, and expect synergy guidance, plus visibility of 2009/2010 FCF, to drive continued N-T outperformance.

■Approval As Expected. Last February, when the deal was originally announced, we projected a 70% likelihood of approval — a Street high. The DoJ’s comments yesterday confirm our view that XMSR ($13.79) and SIRI ($3.15) operate in a broadly defined market which includes terrestrial radio, digital music players and other sources.

■FCC Concessions Likely to Be Small. With the DoJ process complete, we expect the FCC to announce its decision shortly. We expect approval of the merger, with several modest concessions consistent with proposals from both companies. These include price controls, a la carte program packages, and access to public interest programming.

■Integration to Begin Immediately. Given shareholder approval back in November, and the long-time each company has had to plan, integration should begin swiftly. We expect immediate savings from SAC and G&A. Renegotiation of deals with OEMs in the next few years could improve margins substantially. Ops improvements will take longer due to the different satellite technologies.

■FCF to Drive Valuation. We project 2010 FCF/shr of $0.22. SIRI should trade to >25x this number in the next 12-18 months. At the 4.6x exchange ratio, XMSR still trades at a 4.8% discount, creating a near-term opportunity.

7. UBS analyst Lucas Binder

Higher Likelihood of Merger Completion
SIRI-XMSR merger approved by DOJ; FCC could approve in early 2Q08

Following the approval of the SIRI-XMSR merger by the DOJ, we believe that the FCC could announce a ruling by early 2Q08. While neither SIRI nor XMSR has given guidance on what potential synergies may exist, we analyzed some key metrics in the combined business.

Projected pro-forma impact on 2010 multiples
We focus our analysis on the reduction of duplicate costs, specifically by lowering XMSR’s 2010 expenses. Using the midpoint of our assumptions, including the elimination of the XMSR marketing budget, reducing XMSR’s G&A by 50%, Programming and Content by 15% and R&D by 20% the combined company’s 2010 EV/EBITDA multiple decreases to 19.9x from 43.0x and 2010 P/FCF multiple decreases to 20.4x from 59.2x.

8. Wachovia

Wachovia remains cautious on the SDARS sector.

• DOJ APPROVES SIRI/XMSR MERGER- The Department of Justice announced late Monday afternoon that it had finally approved the merger of SIRI and XMSR after more than a year of deliberation. In a statement released by the DOJ, it concluded that a merger between the two satellite radio companies “posed no harm to competition and that there was no potential harm to consumers from the two companies combining”. With the DOJ decision now out of the way, FCC approval would appear to be a foregone conclusion. There are likely to be material conditions attached to this deal that will be released when the FCC officially rules on the deal (expected by early April at the latest) which could include a la carte pricing, a price freeze, and spectrum givebacks. XM shares are currently trading at an implied 5% discount to SIRI’s 4.6 share (for each XM share) offer.

9. Bear Stearns analyst Robert Peck

Peck carries a $5.50 price target for Sirius, and a $24 price target for XM.

Finally! Justice Delayed, But Not Denied

As expected, though long overdue, the DOJ announced that it was closing its investigation of XM’s merger with Sirius, in other words approving the deal from an antitrust perspective.

FCC Approval Next. With shareholder approval in November 2007, the only regulatory step left is the FCC approval, which we think is likely over the next 30 days. Note, the FCC and DOJ likely coordinated their decisions, hence approval is not likely in question. The FCC Chairman has stated that he has a very favorable opinion of the a la carte pricing schema proposed by Sirius and XM. As a result, we do not think the FCC’s conditions to the merger are likely to be onerous.

Debt Refi - The Next Step. At its 4Q07 conference call, XM had disclosed that it was in discussions to potentially refinance debt with change of control provision likely impacting $600M 9.75% notes, $200M floating rate notes, and $230M satellite sale & leaseback debt. While the credit environment is not very favorable, we anticipate the companies will be able to refinance the existing debt even if they have to pay some premium for rolling over the debt to the merged company.

Tyler Savery Position - Long Sirius, Long XM

Comments

[User 168287]

So 18 months ago GS bought a ton of XM. Now they represent the only disenting view on the future of satrad. I respect GS's positon but would like to know if they are shorting shares as they degrade the stocks future?

[User 168287]

So 18 months ago GS bought a ton of XM. Now they represent the only disenting view on the future of satrad. I respect GS's positon but would like to know if they are shorting shares as they degrade the stocks future?

[User 168418]

WITH DOJ APROVAL AND OUT OF THE WAY I CANT UNDERSTAND WHY SIRIUS IS BACK UNDER $3.00 A SHARE.

[BABABOOOOOOIE]

Read between the lines for GS

We are adding SIRI to the Conviction Sell List with 30% potential downside to our unchanged $2.25 12-month price target.

Translation: 70% upside.



With the “DOJ Catalyst” now behind us, we believe the current share price does not reflect
(1) a lowered base cash flow outlook;

Translation: Higher cash flow... ability to pay off debts



(2) the effect of potential FCC conditions, and, as a result, near-term executable synergies; and

Translation; SIRi/XM renting band-with .... more income!!



(3) possible near-term liquidity hurdles. We think the combination of

Translation: More Equipment than the company knows what to do with!



(1) and (2) increase the risk of significant dilution attached to (3), particularly if it is necessary to refinance the +$1 bn of XM’s putable debt and raise new working capital given the status of the debt markets and continuously declining forward estimates.

Translation: Don't come to Goldman Sachs for money...
They're Broke!

Catalyst:
We believe SIRI shares, having closed at $3.15 following the DOJ approval, have likely marked a near-term high, similar to the $3.75 February 2007 peak upon deal announcement. Given a combined $11.5 bn EV and $7 bn of implied synergies, we recommend investors sell SIRI shares to take advantage of likely: (1) continued deterioration of fundamental trends;

Translation: It'll go down a little more before the FCC makes the announcement.



(2) recognition of potential FCC conditions and integration risks;

Translation: People love naysayers.... so GS says Nay...Nay...Nay


(3) unfavorable debt refinancing; or

Translation: Possible higher near-term rates on merging of existing debts.


(4) de facto FCC rejection of the deal.

Translation: I like to use latin when possible. FCC has power and legal authority to impose restrictions only on band use!! They can't keep companies from joining. A review of the licencing frequency is almost a certainy.

With the DOJ approval now out of the way, the primary obstacle cited to shorting the stock has also been removed, with the market now more apt to apply a more appropriate valuation relative to the opportunity.

Translation: People do not like to wait... Expect Volitility. Sell a portion now & come back when it dorps a little, and buy back.



My Personal position on this stock: LONG

[User 168488]

Remember everyone...terrestrial radio makes the bulk of it's revenue from advertising. With over 16 Million subscribers, satellite radio, not only gets revenue from subscribers, but has a huge amount of potential customers for any new movies, product or service. Advertising revenue will only continue to rise.