SIRIUS XM SATELLITE RADIO NEWS

While Ibiqity’s FCC filings in the proposed merger between Sirius and XM indicate that they do not see themselves at the point of being viable competition for satellite radio yet, their feelings discussed in a National Association of Broadcasters board meeting paint a different picture. That’s sometimes how things are though.

NAB BOARD MEETING EXCEPT

Bob Struble, president of iBiquity Digital Radio Corp., updated the Board on what he termed a “breakthrough year” for HD Radio in 2007. He noted that HD Radio receiver sales topped 330,000 in 2007, compared to 40,000 the previous year. He thanked NAB for its support of HD Radio and urged broadcasters to continue to expand promotional efforts to help boost consumer demand.

Caroline Beasley, chair of the HD Radio Technology Advancement Task Force, briefed the Board on efforts by the Task Force and the HD Radio Alliance to target auto manufacturers with positive HD Radio messages. The goal is to encourage carmakers to “fully equip” vehicles with an HD Radio.

Given the data presented, HD Radio saw growth of 825% in HD radio sales from 2006 to 2007, and now stands at 370,000 consumers. For Comparison, it Took XM six quarters to reach the same level of penetration and Sirius 9 quarters.

Interestingly, HD Radio has stated in FCC filings that the exclusive deals are prohibiting them from being included in the OEM channel. Sirius Buzz has pointed out that this is not the case, and that HD Radio is free to negotiate with OEM’s. It appears that is exactly what they intend to do with their statement that they will “encourage” auto makers to fully equip vehicles.

It is always interesting seeing how the “argument” changes depending on the audience that is listening.

Position - Long Sirius, Long XM

Sirius announced today that they will celebrate Black History Month with a series of specials honoring the contributions made by African-Americans that are entrenched in our nation’s history. The diverse programming will be spread across a myriad of Sirius channels and host by various on air personalities.

Mark Thompson, the host of the daily political talk show Make it Plain (ch. 146), will honor Black History Month by speaking with NAACP representatives about their grassroots efforts in addition to interviewing prominent African-American historians and authors about pivotal men and women in the civil rights movement.

Famous First by African-Americans will feature artists including Alicia Keys, Lionel Richie, Beyonce, Mary J. Blige, Chaka Khan, and Jamie Foxx remembering famous first achievements by African-Americans throughout history. The special series will run on Heart & Soul (ch. 51).

Praise (ch. 68) and Reggae Rhythms (ch. 97) will recognize the legacy of African-Americans by spotlighting people and events that have contributed to making a lasting and positive change in our nation’s history. The featurettes will run hourly throughout the month of February.

Black History Month in Soul Town (ch. 53) will highlight key African-American figures in politics, sports, arts and entertainment that have left lasting legacies in their respective fields in a daily show.

My Life, My Music! will honor achievements and contributions African-American women in hip-hop culture every weekend throughout the month of February on Hip-Hop Nation (ch. 40).

Janco analyst April Horace has upgraded both Sirius and XM and did a line by line synergy analysis. The synergies, according to Horace come in at $4 Billion over the next six years. For Sirius, Horace upgraded from “market perform” to “accumulate”. She has a standalone price target of $3.80 and a merged price target of $3.65. For XM the upgrade was from “accumulate” to “buy” with a standalone price target of $15.00 and an arb price target of $14.16. Horace also speculates that the merger will be approved.

REPORT EXCERPTS

Taking a Stab at What the Combined Company Would look Like:
Soon after the merger was announced, many of our competitors issued reports with projected cost synergies as high as $11 billion over a 5 year period. We remained on the sidelines when these reports were issued, as we didn’t believe the synergies were that great. However, after almost a year, when things have settled down, and it appears that the merger will be approved, we have decided to take a stab at what the combined company could, in fact, save on a line item by line item basis. Based upon our analysis, we believe the companies could save $4 billion over the next 6 years. Mel recently stated that the independent third party review found cost savings that were in excess of one of the company’s market caps (i.e., XMSR at $4.1 billion and SIRI at $5.25 billion). Our estimate ended up right on the low end. Factoring in the XMSR dilution, we would place a merged price target for SIRI at $3.65. As we are going to assume that the merger is eventually approved, we are upgrading SIRI to an Accumulate with a merged price target of $3.65 and upgrading XMSR to a Buy with a current arbitrage price target of $14.15.

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As those that have followed Slacker are aware, the new Slacker Portables have begun shipping. The Slacker portable allows an Internet radio to be taken mobile, thus combing customized radio stations on the Internet with MP3 player type portability.

Slacker has even introduced a video that gives new users and consumers considering this new service a good feel for what their Portable unit is all about and how it works. Looking at the video, it is clear that the user interface is consumer friendly. It has also been reported that over 90% of users are taking advantage of a cool feature which allows them to pre-install their personal preferences on the portable units so they are ready to go the moment they arrive at the doorstep.

[ via SlackerActive ]

Let me get straight to the point. The Georgetown Partners proposal to the FCC is a blatant handout request. Imagine investing hundreds of millions of dollars into a business that is on the cusp of showing true viability and then having to give away 20% of it. That is exactly what Georgetown Partners is seeking, and they are bold enough to seek this without any REAL detail. As frustrating as this would be to Sirius and XM as well as shareholders, it should be raising red flags with the national Association of Broadcasters and the emerging HD Radio.

In past articles we have covered the Georgetown Partners Proposal and broken down various problems with it (Georgetown Partners Seeks Handout and A Deeper Look At Georgetown Partners), so there is no real need to cover that aspect of their proposal at this point. This article delves a bit deeper into concerns that The National Association of Broadcasters and Ibiquity may have with a proposal such as that offered up by Georgetown partners.

If Georgetown Partners were to somehow get their agenda attached to the proposed merger, there would be an instantaneous creation of a commercial based digital audio entertainment platform that is available for free to every satellite radio already built, as well as all future satellite receivers.

In many ways, Georgetown Partners is seeking the exact same thing sought by Ibiquity. A virtually free ride into a viable business platform. Imagine 60 satellite radio stations available for free on the national footprint that exists with satellite radio. One difference between satellite radio and terrestrial radio is the commercial load. Satellite radio carries commercial free music and relies on subscription fees, while terrestrial radio is free but carries a commercial load. Theoretically, if Georgetown Partners was in the equation, they would be competing quite heavily with terrestrial radio for advertising dollars.

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Merger watchers and sector followers have likely noticed that when Ibiquity files a comment or speaks to the FCC, they take no official stance on the merger. This seems odd in that HD radio stations are terrestrial radio stations that have adopted a new digital format. Traditionally, most, if not all, terrestrial radio stations as well as the National Association of Broadcasters have come out strongly against the merger. So why does Ibiquity take a neutral stance?

They Want Something Out Of The Deal

Ibiquity wants two specific things to happen if the merger goes through. First they want a requirement that all SDARS receivers be equipped with HD Radio. Second they want all exclusive SDARS OEM deals to be undone. These are concessions that Ibiquity would not have a prayer of getting if the merger does not go through. Thus, the merger between Sirius and XM has a possibility of benefiting Ibiquity if it is passed with these two stipulations.

Inclusion Into SDARS Receivers

Satellite radio launched prior to HD Radio. Consumers have already bought SDARS receivers. Those that have done this are not likely to opt to have two PNP units installed in their cars. HD Radio has already seen the retail channel soften for such audio entertainment devices. They are in effect third to market (after XM and Sirius), where those that were most likely to adopt the service have already adopted satellite radio. This makes retailing of plug and play units more difficult. Had Ibiquity launched prior to satellite, the tables would have been turned, and it would be SDARS trying to play catch up.

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Analyst William Kidd of Wedbush issued earnings preview reports on Sirius and XM today. Wedbush sees Sirius as a buy with a $3.50 target and XM as a sell with a $9.00 price target. Obviously these targets are established with the companies as separate entities. If an investor felt that the merger would pass, they might consider buying into XM because the arbitrage is very attractive at this point.

SIRIUS REPORT EXCERPT

2008 Guidance Likely Encouraging

2008 guidance should garner most of the attention as opposed to earnings when Sirius reports in February.

We are expecting Sirius to guide to at least 10 million subs for 2008 vs. our 10.2 million forecast up from 8.3 million subs in 2007. Cash flow guidance should be the other key area, with the question being whether or not Sirius guides to being free cash flow positive for the year. However, even though we are not expecting the company to turn FCF positive until 2009, we still expect marked improvement in 2008. Our projected free cash flow trend has tended to be more conservative than our perception of management’s expectations. Consequently it would not be inconceivable if the company guides to positive free cash flow in 2008, assuming no merger. All that said, we would be disappointed if the company backed away from stand alone guidance as a result of the merger process.

Subscriber growth is a non-issue since the results are already known.

Sirius earlier reported 8.3 million subscribers at the end of 2007, in line with our estimated 8.3 million subs. We estimate that 4Q gross additions were 1.15 million vs. 999k 3Q07 and 1.23 million in 4Q06. Given ongoing talk of a weaker consumer and the growing potential for weaker car sales, it might not be readily apparent that Sirius posted its highest gross additions ever in 2007. The subscriber preannouncement also de-emphasizes the importance of EPS, assuming no unusual anomalies, since the subscriber announcement already provides considerable insight into the likely EPS result. In terms of 4Q EPS expectations, we are expecting an EPS loss of $0.12 vs. the consensus loss estimate of $0.13.

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U.S. Electronics, the company behind the XACT branded satellite receivers has filed a Freedom of Information Act request with agencies in the Federal Government. U.S. Electronics is seeking information relating to the interoperable receiver mandate that was issued as part of the grant of licenses to the two satellite radio operators.

As Sirius Buzz readers are aware, U.S. Electronics is currently in arbitration with Sirius over a legal dispute. The company came into troubles with Sirius when they contracted under a separate name to produce receivers for XM Satellite Radio. The relationship with Sirius quickly deteriorated to the point where the differences between the company’s went to arbitration.

In this latest filing, U.S. Electronics is seeking documents from the following:

Office of The Chairman, Office of Commissioners, Enforcement Bureau

Each non privileged, non exempt document from July 1, 2005 to date in connection with “Petition for Declaratory Ruling to Clarify The Lack of Enforcement and Implementation of the Interoperable Mandate”

Internal Bureau - Satellite Division

All documents from 2005 to present relating to certifications required of SDARS operators “that their systems include a receiver that will permit end users to access all licensed SDARS systems that are operational or under construction” They reference a letter to Sirius’ Patrick Donnelly.

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Banc of America Analyst Jonathan Jacoby is no longer under the employ of the Bank. Sirius Buzz has learned that the analysts last day with Banc of America is today. Jacoby has been a common subject among satellite radio watchers. His coverage of the sector has been on the bearish side, with reports often seeming to add fuel to the fire on the negative side on any news be it good or bad.

There has been no statement issued by Banc of America and no announcement has been made as to whether the financial institution will name a new analyst to cover the sector, or simply drop coverage altogether. No news has circulated on where Jacoby might land. Those that feel positive on the satellite radio sector will likely be happy with the news. Jacoby’s last report has a price targets at the low end of analyst ranges for both Sirius and XM.

Position - Long Sirius, Long

The Drudge Report is stirring the rumor pot on the Sirius and XM merger. The information offered on Drudge is scant, but being that the site is read by many, it is sure to have a ripple effect in the sector.

“APPROVED OR DENIED? DRAMA BUILDS AROUND SIRIUS-XM MERGER… DEVELOPING…”

That’s the entire Drudge quote at this point. This will certainly develop web hits as trading starts tomorrow.

The key take away here is that yes, things could well be coming to a head on the merger. The recent filings with the FCC, and the comments made by the FCC regarding a Q1 decision coupled with most feeling that the DOJ will announce first leaves little time for things to transpire.

Sector watchers will be glued to the news wires on Monday. Will the stocks respond to these latest rumors? Only time will tell. My opinion is that the more time that passes, the more likely we are to see additional speculation on the merger.

[ DrudgeReport via Orbitcast ]

Position - Long Sirius, Long XM