Bank of America's Jonathan Jacoby issued a note on satellite radio today. While not included in our report excerpts, Jacoby stated in his report that he anticipates Sirius getting 100% market share of net retail additions. Given the NPD reports for July and August, it looks very likely that XM will report a negative number in the net retail addition subscriber category, and Jacoby joins a couple of other analysts who have come to a similar conclusion. Investors can discuss their views in the XM Stock Talk section of the Sirius Buzz Forums.
Despite indications from the FCC that they would like to bring the merger matter to a vote in the fourth quarter, Jacoby's "DC Contact" remains in the same stance they were in since the merger was first announced, and remain at a 30% chance of approval. However, unlike past reports, Jacoby seems to be separating himself from the "DC Contact" by spelling out quite clearly that this is the opinion of the "DC Contact", whereas in the past his reports have indicated his opinion, based on information from his "DC Contact".
What seems odd is that the "DC Contact" has seen no changes whatsoever after comment periods, reply periods, no FCC clock stoppage, DOJ second request compliance, a-la-carte details, pricing details, etc. It is almost as if the "DC Contact" feels that nothing has transpired through the entire Spring and Summer.
bullish bearish views on satellite, which have in the past erased hundreds of millions of dollars of market cap in this sector with the issuance of a report, have actually been having the opposite effect. If the stocks close green today, they will have done so on four consecutive reports from the BOA analyst.
Report Excerpts from Bank Of America after the jump...
Sat Radio: Timing Delay at the DOJ? Remain Cautious on the Space
DOJ May Take Longer than Hoped
- News: The press is reporting that Thomas Barnett, head of the DOJ’s antitrust division, stated yesterday at a Congressional hearing that the DOJ would require more information before being able to make a decision on the XM/SIRI merger, but would move as quickly as possible to render a decision. The big question is what does “more information” require for the merger process at the DOJ? Will it require more documentation from the companies or just more time by the DOJ to review the submitted documents? We note that we have not yet had a chance to speak with our regulatory contacts this morning.
- Delay could be minimal but it could also be longer than the market would anticipate. We believe the market is hopeful that the DOJ will be rendering a decision on the merger in the next 15 to 45 days; and while this is still possible, it is more likely to take longer.
- We continue to remain cautious on the regulatory process. Our contacts “peg” the chance of the merger hopefuls receiving required regulatory approvals before the end of 1Q08 at ~30%. In summary, they believe the DOJ process will be much more complicated than the Whole Foods merger – and more complex than what the Street is currently discounting. In the Whole Foods (WFMI, $45.72, Neutral, TP: $41)-Wild Oats merger, the applicants simply had to prove a low barrier to entry, as compared to the XM-SIRI merger, where the applicants need to have the DOJ expand the market definition of “audio entertainment.” Additionally, our contacts believe that the FCC will have to clearly delineate as to why it considers the landscape much larger – i.e., broader audio entertainment landscape – for satellite radio, but maintain local ownership rules for terrestrial operators. The risk for the FCC is that it finds itself back in the courts – a place where it hasn’t won any recent decisions.
- Speculation around a Google bid for Sirius (source: StreetEvents) seems a bit unrealistic. The merger documents have a no solicitation clause, and contain a deal breakup fee of $175 million. We (and the BofA Internet research team) view such a transaction as unlikely (less than a 10% chance). Sirius management has not commented.
- We remain cautious – market seems more optimistic on the approval process than our regulatory contacts and underlying metrics appear to be worsening. The stocks appear to be discounting an 85%+ chance of deal approval. And we believe there is limited upside from here even with a deal approval – The combined EV is trading at ~15x PF 2010E EBITDA (includes $150M synergies). Weaker than expected retail, Rising SAC/CPGA, churn to increase, rev share increasing w/ OEM penetration, and risk to music royalty rates. For 3Q, we believe that XM will miss our 354K net add estimate, while SIRI should meet our 410K estimate.
Position - Long Sirius, Long XM