SIRIUS XM SATELLITE RADIO NEWS

Well, it is now official and in black and white. The FCC updated their “items In Circulation” list today and the proposed merger of Sirius and XM is on the list. The Draft Order circulation happened on June 17th.

At this point, the commissioners all consider the draft order and make their voting determinations. Watch for possible announcements about voting intentions over the coming two weeks, although commissioners do not always give an indication of their voting intentions.

With the Draft Order officially issued, an answer on the proposed merger is within reach.

FCC Items In Circulation List

Position – Long Sirius, Long XM

In a note issued today, Cowen analyst Tom Watts was very pointed in his disagreement with Goldman’s Wienkes.

“We Disagree With Competitor’s Negative View,” noted Watts. He also stated that investors could, “Expect a Rebound.”

“Yesterday, Outperform-rated SIRI ($2.13) traded down 13% and XMSR 18% ($8.61). A competitor’s note (with which we disagree) contributed and technicals may have widened the arb spread. We expect FCC approval and the debt restructuring to drive a rebound of both stocks in the near term.”

Watts cited several factors including increased OEM installations (penetration rate) would offset slowing car sales, substantial merger synergies of $5 billion, FCC approval in July, the debt issue being closed not as big a hurdle as some anticipate, and the arb spread to begin to narrow again as anticipated merger closure draws near.

While watts did not take on specific aspects of the Goldman report, some obvious factors that I note are that Goldman states that “young people” are buying MP3’s. This is not real news. The “young people” have not been the largest contributor to SDARS subscriber-ship since the beginning. Additionally, the A-La-Carte pricing may make subscriber-ship something that is more budget friendly to the younger crowd. Combine MP3 capability with the “music discovery” allowed by satellite radio, and there could be a winning combination. The MP3 crowd is often music centered. A satellite radio service at $6.99 per month that enables fans to get only what they want may well carry more appeal.

Additionally, Goldman cited that ARPU would be impacted with the new pricing plans, and mentioned an OEM take rate of 50%. What it would appear Wienkes did not consider was that more attractive pricing points may increase subscriber-ship, thereby offsetting a lower ARPU (oversimplified example):

CURRENT TAKE RATE 50%

100,000 cars turn into 50,000 subscribers paying $12.95. 50,000*12.95 = 647,500 – ARPU of $12.95

TAKE RATE OF 50% Full Price, and 10% AT $6.99

100,000 cars turn into 50,000 @ $12.95 and 10,000 @ 6.99. 50,000*12.95 + 10,000*$6.99= $717,400 – ARPU of $11.96

While the ARPU is indeed almost $1 lower, the revenue coming in the door has increased. The ability to capture additional subscribers at the lower price point represents more dollars. ARPU is an average metric of revenue per subscriber. Simply stated, the business model will shift a bit more towards volume, something that it appears Goldman’s analyst has not fully considered.

With no company guidance, and no real certainty it becomes hard to know what analysis to count on. There simply is nothing for anyone to hang their hat on. Goldman is the “golden child” of the moment, but how long will that last. SDARS is quickly approaching a level where Wienkes will need to come out with yet another opinion. Will he “upgrade” from “convicted sell” to “sell”, or adjust his target further down? Only time will tell.

Position – Long Sirius , Long XM

Mazda Motor of America, is providing a new way for its dealers to promote the Sirius Satellite Radio they already offer in many of their vehicle models, as well as a method for getting the message out about new Mazda models and other dealership news.

With the help of Applied Media Technologies Corporation (AMTC), the national provider of Sirius to businesses, all U.S. Mazda dealerships are able to reach out to their customers with music and customized marketing messages both in the showroom and during telephone “on-hold” time.

“When we opened our new Mazda Retail Revolution dealership in Temecula, Cal., the only things missing were quality in-store music and a telephone on-hold messaging solution. To our surprise, both services could be found from one source, AMTC,” Temecula Mazda Vice President Bill Brumbaugh said. “With AMTC’s help, we installed Sirius Satellite Radio and TelAdvantage messaging, engaging customers both in the dealership and over the phone. Sirius provides crystal-clear digital sound with 67 channels to choose from, and TelAdvantage allows us to customize our on-hold messages to our liking.  Often, our guests comment on the quality and selection content while visiting and calling our dealership. We explain to our customers that when you purchase a Mazda from us, you can have this same SIRIUS Satellite Radio experience in your vehicle every day. I can’t tell you how many guests turn into customers for life.”

Retail studies have shown that music greatly influences customers’ purchasing patterns and decision-making processes, helping to establish the mood, motivate the subconscious, and create a lasting impression on existing and potential customers. However, in order for a business to reap these benefits, performance royalties must be paid per song, and stiff fines await those who neglect the payment of these fees. Businesses also face the challenge of finding suitable music to play in their establishments. CDs are repetitive, and terrestrial radio comes fraught with aggravating commercials, and worse, advertising for competitors.

Position – Long Sirius

Goldman Sachs analyst Mark Weinkes outlined a bearish situation for SDARS that sent both Sirius and XM plummeting lower on heavy volume. Weinkes, who has been bearish for quite some time went grizzly bearish. Both Sirius and XM had staved off previous anticipated Goldman lows now, but new price targets set even lower seem to have taken the feet right out from under satellite radio.

Weinkes established new price targets of $1.75 and $6.50 for Sirius and XM respectively. These new prices are down from $2.25 and $11.50. The new prices would give more implied room at the bottom than many previously anticipated, and the new lower targets could well have given short traders more confidence that a short position would pay off better than they previously had thought.

Goldman cites slowdowns in subscriber growth, debt refinancing, existing costs associated with debt, and a lower revenue per subscriber as some of the reasons for their latest thoughts on this sector. The lower price targets even with a merger are frustrating enough for longs, but a $1.00 stand alone price on Sirius shows that Weinkes is no fan of the satellite radio business model.

All of this transpires just as it appears that Sirius and XM may be on the verge of FCC approval of the license transfer, paving the way for the companies to merge. Goldman sits at the direct opposite end of the spectrum than Citigroup, which has much higher price targets for a merged company. So far it would appear that Goldman has a large audience listening to their analysis.

Position – Long Sirius, Long XM

Live From New York City……It’s Sirius Buzz Radio. That’s right, I am in New York, and eager to share my thoughts on the recent activity with Sirius and XM. Martin’s endorsement, the concessions, and even some commentary on the opinions of those speaking out against the merger.

Sirius Buzz Radio airs each week at 10:00 PM. Callers are welcomed and can participate by dialing 347-945-7995. Tune into the live show – Sirius Buzz Radio

Position – Long Sirius, XM.

Retail sales for satellite radio according to NPD Group were stronger in May than they were than April. NPD Group tracks retail sales from various major stores, but does not include all retail sales. Sales made directly by Sirius and XM are not counted either.

While month over month comparisons show progress, the year over year comparisons were a split decision in the SDARS sector. Sirius was of 2% on a year over year basis while XM was off 36%.

June will be the telling month on the retail channel. Father’s Day and Graduations typically represent a boost in retail sales. So far NPD tracked retail sales are progressing ahead of the first quarter, which is a good sign. In Q1 XM had negative NET retail additions, and Sirius had a modest NET retail gain of a bit over 2,500 subscriptions.

According to Stifel analyst Kit Springs, Sirius is pacing ahead of what was anticipated, and XM is on pace with what was anticipated, meaning that expectations on the sector as a whole are ahead of the analysts projections.

Retail is not hitting on all cylinders, but perhaps more problematic is the OEM channel which is seeing decreased production and poor sales. OEM was anticipated to be the driver for SDARS in 2008, but even as analysts are seeing better than expected retail, they are having to now adjust their OEM models.

Retail sales have likely been impacted by the lack of new hardware, merger confusion, and a slumping economy. SDARS needs a strong June to finish off the first half of the year.

Position – Long Sirius, Long XM

Yesterday we indicated in our article Merger Signed Sealed And Awaiting Delivery , that the formal letter outlining the concessions of the merger would be posted to the FCC website this morning. This has now happened, and the market will now be able to digest exactly what the FCC commissioners are voting on. This letter represents the agreements that Sirius and XM have made regarding the merger, and the issues that the commissioners will consider with the draft order issued by the FCC Chairman Kevin Martin. Concessions include:

A-LA-CARTE PROGRAMMING

• 50 channels for $6.99 with additional channels priced at $.25 cents each. Capped at $12.95
• 100 channels for $14.99
• A-La-Carte radios will be available within three months

BEST OF BOTH PROGRAMMING

• Subscriber will receive their base service (Sirius or XM) and will get the best of the other service for $16.99

MOSTLY MUSIC OR SPORTS NEWS AND TALK

• Available for $9.99

FAMILY FRIENDLY

• An $11.95 price for base subscriptions and a $14.95 price for the best of both subscriptions.

PUBLIC INTEREST CHANNELS

• The combined company will set aside 4% of the full time channels. Part time channels get aggregated. This currently represents 6 channels from Sirius and 6 channels from XM.
• An additional 4% will be leased to a qualified entity which Sirius and XM have no editorial control. The 4% will be maintained as compression technology advances.

OPEN ACCESS

• To be included within 1 year of the merger.

SERVICE TO PUERTO RICO

• Service within three months of merger

INTEROPERABLE RECEIVERS

• Available within 1 year of merger

RATE FREEZE

• 36 month rate freeze

In my opinion the concessions outlined are not overly burdensome, and do not strip away synergies of the merger. many concessions are outlined for public interest, and in the interest of the consumer. Sirius and XM maintain control over their network, and can grow their business as technology advances.

[ FCC Filing ]

Position – Long Sirius, XM.

Today it was made public that Chairman Martin not only would be issuing a draft order regarding the merger of Sirius and XM, but that he indeed supported the merger. This is probably the most positive news that SDARS has seen since the DOJ announced approval back in March.

What today’s activities mean, at a minimum, is that Sirius and XM have reached an agreement in principal with the Chairman of the FCC, and likely some of the other commissioners as well that would allow the merger to progress.

I have stated that I expected the draft order to be circulated by Wednesday. I would expect that Sirius and XM have already made a filing outlining not only the voluntary concessions that could not be mandated by the FCC, but also the other concessions that were within the power of the FCC to mandate. I would anticipate this filing to be published on the FCC website as early as tomorrow morning. This filing will give the basis for the vote that the commissioners will have within the next couple of weeks. The filing will also give the street their first look at the concession list.

It is my opinion that at this point all concession negotiations are now essentially complete, and the vote is the finish line that sector watchers have been looking and yearning for. All of this is now within site.

Understanding that 1) negotiations are complete and 2) that Martin, who supports the merger, would not call a vote unless he was relatively sure of the outcome causes me to conclude that a positive outcome is only two weeks or so away.

For whatever reason, the street was still a bit gun shy with today’s news, but that may well change tomorrow when we get concrete evidence of the exact conditions of approval. Today, analysts offered various opinions:

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