SIRIUS XM SATELLITE RADIO NEWS

The FCC has finally put the merger between Sirius and XM into writing. The documents, made public after 4:00 PM on July 28th outline the regulatory approval of the merger. Four of the five commissioners also offered published opinions on the vote.

This official document, the lack of any action by the National Association of Broadcasters, and what should be the final touches on financing issues should enable Sirius and XM to consummate the merger in the next few hours. When this happens, XM shares will no longer exist.

Full press release after the jump…

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As an investor in both Sirius and XM, I was very concerned with the drop in price following an exceptional quarterly report and subsequent SEC filings relating to an Xm debt offering. What we are seeing today is a common arbitrage play with regard to convertible debt offerings called convertible arbitrage. Such offerings are an open invite to short the common stock against the debt.

These XM convertibles will be converted to Sirius shares. Because Sirius shares are not available to short against, it would have made placement of the debt securities impossible. By providing the shares, Sirius aides in their placement. This is not shorting as we think of in a normal sense. These shares were not on the market to begin with. Other traders are selling into this which is the cause of the decline.

In the Goldman Sachs report, they expected the debt offering to be over 1 billion dollars. Giving credit where credit is due, they saw this coming. However, the offering today is for only half the amount Goldman’s analyst Mark Wienkes expected, at only 550 million, which may suggest the stock’s decline may be short lived and over-exaggerated.

A company executive said that the offering is necessary for the completion of the merger and relates to xm’s refinancing needs. He also noted that as yet, there has yet been no official press release nor any paperwork signed regarding the merger at the FCC, and that it was expected to close by the end of business today. With this offering, XM’s debt restructuring is complete.

Also of importance is that the company believes that the NAB will not be filing for a stay of the FCC decision.

Position: Long Sirius, XM.

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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