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Concern Replaces Optimism In XM, Sirius Merger
Securities analyst Jonathan Jacoby of Bank of America says that “despite the recent sharp decline in share prices, we maintain our neutral ratings on XM and Sirius Satellite Radio,” and that “stand-alone values and merger synergy values likely are lower than previously estimated.”
Jacoby continues, saying that he’s “lowering our stand-alone estimates due to lower longer-term conversion rate assumptions. New stand-alone value estimates are $2.25 (from $2.50) for Sirius and $10.50 (from $13.50) for XM. We have scrubbed our valuation models for both companies. The principal adjustment was to reduce our longer-term OEM conversion rate estimates for XM to make them more consistent with our longer- term assumptions for Sirius (i.e., 40-45%). Our previous model assumed that conversion rates bottomed at 50% in 2H07. The adjustment to OEM churn shaves ~500K subscribers off of our 2010 year-end estimate.
“Lowering our merger synergy assumption to $3.6B from $5B – sports rights fees could increase initially under the base scenario. Our prior analysis assumed that combined programming and content expenses would be reduced by 15% in ’08 and by 25% in ’10 and thereafter. However, in order to be able to offer baseball or football to subscribers of both satellite networks, the merged entity might need to increase the current payments and/or extend the agreements. Our model now assumes that there are no net programming cost savings as lower costs for certain programming (e.g., music and talk channels) could be offset by higher sports rights fees.
“ The current stock prices seem to suggest that the probability of regulatory approval of the merger is roughly 35-40% - but our FCC contacts believe that the percentage is trending lower. Assuming that our new fair value estimates for XM and Sirius with or without a merger are roughly correct, we estimate that the market implied probability of obtaining regulatory approval for the merger from the DOJ and FCC is between 25% and 40%.
“On a positive note, we see little downside risk to our 1Q07 (and 2007) subscriber estimates. In fact, we believe that XM should beat our net add estimate of 242K (consensus is 334K – we believed that 290K is reasonable). We expect Sirius to meet or beat our net add estimate of 461K (consensus is for net additions of 497K). XM and Sirius will report 1Q07 results on April 26th and May 1st, respectively.
“Our new price targets are $2.75 for Sirius and $12.50 for XM. Given a smaller synergy value estimate and lower stand alone value estimate for each company, we estimate that Sirius would be worth ~$3.50 and that XM would be worth ~$15.50 if the merger is approved. Our new price targets are $2.75 for Sirius (from $3.50) and $12.50 for XM (from $17) – our new targets assume a 40% probability of the proposed merger receiving the necessary regulatory approvals.”
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