SIRIUS XM SATELLITE RADIO NEWS

This past Saturday I wrote a piece titled “XM Shares Still Exist“, an article which had readers split into two camps. Some readers were in the camp that supported my theory, while others were convinced that I had it all wrong, and XMSR shares would not trade today. Well, today came, and XM shares still exist. The question is how much longer will this be the case.

In my opinion, XM shares will cease to exist for tomorrows trading session. In the original article, I cited that I felt the Sirius had a bit more financial management to attend to prior to being able to consummate the deal. This morning we saw that happen with Sirius’ equity offering. Sirius is working with Morgan Stanley and UBS to get the financing issues cleaned up, and likely will be able to have all pertinent items taken care of by close of business today. This will allow them to consummate the deal, and going forward, all shares of XM will be converted to Sirius at an exchange ratio of 4.6 shares of Sirius for each share of XM.

Shares of both XM and Sirius traded down in early trading on Monday, as people try to get their heads around when exactly the merger will be consummated, what the additional financial situation is, and how the arb spread remains what it is. Time is fast evaporating on a pure arb play where Sirius is shorted and the investor goes long on XM. This trade has been difficult for quite some time because it is near impossible to borrow shares of Sirius, as illustrated in the language of Sirius’ equity offering today.

Trading may be rocky, but in my opinion tomorrow will bring one trading symbol for SDARS.

Position - Long Sirius, XM

Citi analyst Tony Wible, upon seeing the preliminary Sirius results sees merger synergies as realizable. While the finalized Sirius numbers are not public yet, the early glimpse issued by the company was enough for Wible to maintain a BUY rating and a $6.50 price target on Sirius.

Wible saw the 2Q08 Pre-announcement numbers as solid, noting, “Revenues of $283 mil (+25.0%) were ahead of our $277 mil (+22.3%) estimate.” Also better than the Citi estimates was the adjusted loss from operations, which came in at ($24) million and was better than Citi’s ($30) mil estimate. According to Wible, the better revenue numbers combined with in-line subs suggest ARPU was better than expected.

Wible noted that the subscriber picture was in line with his estimates, but OEM was a bit weaker than he anticipated, while retail was slightly stronger. SIRI ended the quarter with 8.92 million subscribers on gross subscriber additions of 1.03 million. While the gross number was better than Wibles estimate, the churn came in slightly higher, offsetting the net number slightly.

The Citi analyst also spoke of XM’s announced debt issuance, where the company will offer $550 mil in notes that are exchangeable into SIRI’s stock (likely 4-7% dilution). As part of the deal, SIRI will lend $350 mil in shares to the underwriters, which is solely to facilitate investor hedging transactions given the inability of investors to borrow SIRI shares and will not result in any cash to SIRI or share dilution. Overall, Wibble views this as positive and an innovative way to deal with a tough credit market. This method may help the company wrap up the few details needed to allow them to consummate the merger.

Wibble maintains a Buy Rating and a $6.50 price target because they see significant value to the
combined company from the merger synergies, citing the strong Q2 results from both Sirius and
XM.

The analyst will wait on merger deal closure and full Q2 financials prior to updating their model.

Position: Long Sirius, XM.

Now that Sirius and XM are close to consummating the merger that gained FCC approval Friday, this may be the last subscriber chart that separates out the subscribers of Sirius and XM.

In Q2 2008, XM tallied more NET subscribers than Sirius for the first time in several quarters. XM’s performance in the quarter came on the heels of increased subscriber penetration from OEM deals. While the self paying churn for both companies is about the same, XM has performed better at converting OEM trial subscribers to self paying subscribers. XM converts 53% while Sirius is five points lower at 48%.

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Sirius satellite radio announced preliminary Q2 2008 results today prior to the market opening. The operating results come on the heels of FCC approval of the proposed merger with XM Satellite Radio, and along with an offering.

A new item to note is the addition of a conversion rate for the OEM channel. Sirius announced a conversion rate of 48% as compared to the 53% conversion rate reported by XM. Sirius also noted that the conversion rate for Q1 was 47%.

Q2 RESULTS

– Revenue of $283 Million, Up 25% Year Over Year
– Total Subscribers of More Than 8.9 Million, Up 25% Year Over Year
– Adjusted Loss from Operations Improves 70% Year Over Year

SIRIUS Satellite Radio (Nasdaq: SIRI - News) today announced preliminary second quarter 2008 financial results, including a 25% increase in revenue to $283 million, total subscribers in excess of 8.9 million and a 70% decrease in its adjusted loss from operations.

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After months of delay tactics, hundreds of Ex Parte filings, and even going to the extreme of creating an internet survey where only those responding against the merger were forwarded to the FCC, the National Association of Broadcasters had surprisingly little to say upon hearing the news of the FCC’s approval.

Dennis Wharton stated, “Today’s vote certainly comes as a disappointment to NAB. We continue to believe that consumers are best served by competition rather than monopolies.”

That’s it! A statement from Dennis Wharton. Nothing from NAB President David Rehr, and nothing about the consumers who were for the merger. Perhaps they are busy updating the legislative priorities on the front page of their website to reflect 2008 rather than 2007. Or maybe they are trying to figure out what to do with that space on their website dedicated to opposing the Sirius and XM merger.

Position: Long Sirius, XM.

I have spent the better part of the morning trying to answer the question on everyone’s mind; What will happen with the stock price? I have read through analysts reports that put such a wide range of targets on Sirius, that I thought it might be time to pretend there were no reports whatsoever, and create my own.

Keep in mind, that mine is no better than any other out there, and you should not invest on my results. I have made a LOT of suppositions to fill in the blanks. There are just too many unknowns in the look ahead to arrive at anything but a speculative conclusion. I hope as everyone else does to hear from Sirius regarding its future plans and projections this week.

So I broke out the legal pad and calculator, printed out Sirius and Xm’s SEC filings, and got to work. I looked at last year and assumed results as if we had a year of data to work with. Side by side and adjusting xm’s float by the 4.6 ratio, the first glaring fact is that this truly is a merger of equals.

My immediate concern is that as such, the combined company’s stock price won’t change much with the merger, assuming current valuations are accurate. Because of the synergies however, the stock should warrant a higher combined value, as profitability will occur sooner as a merged company, than as “stand-alone’s.”

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We have just learned of a revised commitment letter filed with the FCC Friday, which details all of the voluntary concessions agreed to by Sirius and XM, in regards to the recent FCC decision.

There are some interesting items of note including a statement that the combined company did not expect to cause or see a reduction in royalty payments as a result of its new offerings, although no commitment was actually made in this regard.

Sirius has voluntarily agreed:

• To work with the commission to resolve all outstanding WCS/Interference issues by the end of 2008
• To make available immediately, the plans and specifications for an interoperable radio available for license to equipment manufacturers; and within 9 months of the merger offer for sale an interoperable receiver in the retail aftermarket
• Not to originate local programming or advertising through their repeater networks
• Provide open access and not enter into any contract that would ban other technologies such as HD
• Reiterated its 36 month price freeze
• Clarified its public interest set aside proposal to include not selecting a programmer to fill more than 1 such channel on each platform, as long as the demand for these channels exceeded the available supply.

All of these concessions are offered voluntarily rather than as a government mandate.

In the end it would appear that Ibiquity, the NAB, Chester Davenport of Georgetown Partners, Jesse Jackson of Rainbow/Pu$h, C3SR and the numerous puppets of the aforementioned groups received absolutely NOTHING in exchange for the money they threw away. In the end, the system worked and America has prevailed!

[ FCC Filing ] Via [ Sirius News & Rumors ]

Amid all of the merger news, there is one common item that many seem to have a question about. Will XM shares still exist on Monday? The answer in my opinion is YES.

The merger deal specifies that each XM share will receive 4.6 shares of Sirius once the deal is consummated. While regulatory approval is in hand, Sirius and XM have not yet consummated the deal, and until they do, XM shares will still exist.

In my opinion, Sirius and XM likely have a few financing items to accomplish over the weekend and on Monday, before they can get down to the proper authorities to set the deal in stone. This could cause a bit of a race. Sure, the NAB or another organization can try to throw a wrench into the works, but most agree that such an effort would be futile. Sirius and XM will be doing everything they can to get this deal finalized.

This could give another day or two of trading. Readers will likely see some roller coaster trading as shorts unwind their positions, those on the sidelines try to get a quick play on the spread, and the companies and organization jockey for headlines. Through all of that, what investors need to remember is that the merger has received regulatory approval. No matter what your trading strategy, this fact will remain constant until the paperwork is finally filed.

Position: Long Sirius, XM.

HD Radio had high hopes of being included in SDARS receivers. If such a requirement were mandated by the FCC, the business model of terrestrial radio could continue virtually unfettered, and without offering up a revenue share to automobile manufacturers.

At this point there is no requirement to include HD in satellite radio receivers. This means that HD needs to go back to the drawing board… literally. The marketing method of HD has thus far yielded deals with only BMW and Ford. In the case of Ford, getting an HD receive means giving up on the highly touted SYNC system, something consumers are not likely to do.

HD Radio is a decent concept, but they need to offer far more to get consumers to clamor for their technology. Whether they like it or not, terrestrial radio’s HD version may well have to pony up subsidies to OEM’s, and maybe even cut a deal with SDARS.

HD touted in the satellite radio merger case that the HD chipsets only cost $10. While Sirius Buzz readers know this is only a portion of the cost, perhaps Ibiquity should bite the bullet and cut deals. HD recently received $40,000,000 from congress to promote their technology. At $10 per chip, HD could get into 4,000,000 cars this year if they are able to convince an OEM to accept $10 to install the technology. Yes, $10 is unlikely to woo the OEM’s, but HD could get a start. In my opinion, HD radio needs to follow a path similar to that which SDARS followed. They need to pay to get into the game.

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The long awaited conclusion of regulatory purgatory that began on February 19, 2007 for Sirius, XM and their shareholders is over. The merger was officially approved when the consent decree was signed moments ago. As advertised, the commission vote fell along party lines with a 3 - 2 split decision.

The definitive agreement indicates that the companies will be combined in a tax-free, all-stock merger of equals. Terms of the deal call for XM shareholders to receive 4.6 shares of Sirius common stock for each XM share held. The transaction is structured as a merger of equals, with Sirius and XM shareholders each owning 50 percent of the combined company.

In a victory for consumers, the content of Sirius and Xm will be joined and in most cases will cost less with a la carte packaging, a revolutionary idea that allows Sirius and Xm listeners to pick and choose the package that best suits their needs. The voluntary concessions include:

• Turning 24 channels over to non-commercial and minority programming.
• Three year price freeze
• Open Access
• A-La-Carte pricing available within 3 months of deal closure

Concessions agreed to as part of the enforcement issues included requirements that the companies:

• adopt comprehensive compliance plans, and take steps to address any potentially non-compliant radios remaining in the hands of consumers;
• in the case of XM, within 60 days of the order adopting the Consent Decree, shut down 50 variant terrestrial repeaters, and shut down or bring into compliance an additional 50 variant terrestrial repeaters;
• in the case of SIRIUS, bring into compliance or shut down up to 11 variant terrestrial repeaters within 60 days of the order adopting the Consent Decree. These terrestrial repeaters were shut off by SIRIUS in October 2006 ; and
• make a voluntary contributions to the United States Treasury of approximately $17 million in the case of XM, and approximately $2 million in the case of SIRIUS.

The FCC will open a new case to look more closely at HD inclusion. Additional concessions were not released at this time.

[ Via AP & Reuters ]

UPDATE:

Sirius closed at $2.25 per share on July 25, and XMSR closed at $9.28 per share. If Sirius and XM close the deal tonight (court is open til 11:00 PM), then the arb spread was $1.08 on XM shares, making for a good trade.

Thinking about it a bit deeper, there are likely a few things that Sirius and XM need to wrap up prior to getting the deal consummated. I think Monday afternoon will be the consummation date.

Position: Long Sirius, XM.