Citi's Eileen Furukawa issued a note on XM Satellite Radio.

REPORT EXCERPTS

XM Satellite Radio Holdings Inc (XMSR) Notes from the EMT Conference

Merger Update — With Sirius and Mel Karmazin truly spearheading the process, XMSR deferred to them regarding the finite details of the merger process. However, they remain optimistic that the merger will be approved.

Prognosis as a Stand-Alone Entity — Investor concern persists regarding XMSR’s outlook if the companies are not allowed to merge. XM stated that while it is hopeful a merger will be approved it is conservatively running XMSR as if it will remain on a stand-alone basis and stressed that current management is still firmly engaged in the business and that XM is well situated to reach self-sustainability even without the merger.

Cost Cutting Potential — XMSR noted that there are cost-cutting opportunities for the company even on a stand-alone basis. Assuming it remains stand-alone, XMSR is likely in our view to assess potential growth opportunity on its own and downsize infrastructure accordingly, which would be a positive.

Satellite Replenishment Cycle — XMSR is in the favorable position of having basically completed its most recent satellite replenishment cycle, with only about $50-$60 million in cap ex left related to a spare to be spent in 2009.

Conversion Rates — XM notes the biggest driver of conversion rates has to do with the dealer selling the car, with some dealers reaching 80% conversion rates. It also noted that thus far price points of cars surprisingly aren't really the determining factor in terms of conversion rates.

Company description
XM Satellite Radio Holdings Inc (XMSR) is a leading satellite radio company and is one of only two companies having been granted a license by the FCC to operate a national satellite radio service in the United States. XM provides a nationwide subscription-based offering of over 160 digital channels of commercial-free music, entertainment, news/talk, sports, traffic, and weather programming, aimed at vehicle, home, and portable radios. XM boasts exclusive OEM partnerships with several major automotive manufacturers, which factory-install its satellite radios in their vehicles, including General Motors, Honda, Hyundai, Toyota, and Nissan. For 2007, XM satellite radios are available in over 140 different vehicle models through both factory and dealer-installed programs. XM satellite radios are also offered in the aftermarket at various consumer electronics retailers, including Best Buy, Circuit City, and Wal-Mart.

Investment strategy
We rate the shares of XM Satellite Radio Holdings Inc Buy/ Speculative (1S). In our view, satellite radio still remains one of the few areas within the media sector that offers attractive secular growth. Further, after a difficult 1H07 in terms of net add growth, we see better growth ahead, starting in 2H07 and beyond, for the satellite radio industry due to ramping subscriber growth from the OEM channel (stemming from already committed, factory installations at key auto manufacturers). Still, with a proposed merger with Sirius Satellite in the works and a high level of uncertainty as to the outcome, merger-related news flow will likely be the key stock driver for now. We continue to feel there is greater than currently expected potential upside if the merger goes through, and that there is a greater probability that the deal is consummated than currently reflected in the stock. Understanding the strictly binary potential paths for XM stock on whether the deal is approved or not, for investors with a greater risk tolerance, we think the risk-reward in XM favors investment in XM stock.

Valuation

Our $19.50 price target is based on a probability weighted analysis on whether or not the proposed XM/SIRI merger will gain governmental approval and be closed. Specifically, assuming 20% downside risk to the price if the deal does not close, and a 62% upside if it does (assuming a PV of $7.2 billion in synergies), and assuming a 69% probability that the deal goes through, we arrive at our $19.50 price target. Further, our analysis assumes a Cost of Equity in deriving the present value of synergies of 9.3%, a risk free rate of 4.9%, an equity risk premium of 3.3, and beta of 1.3 which translates into a terminal year multiple of 13x (based on a long-term free cash flow growth rateestimate of 15%).

Risks
We have assigned a Speculative Risk rating to XM Satellite due primarily to strong stock impact up or down from the binary decision on whether or not XMSR and SIRI’s proposed merger is approved. Other risks also include the fact that XM is still in the early stage of its business cycle and thus still operating with quarterly net income loses. Furthermore, if Retail subscriber growth slows faster than expected, or OEM growth accelerates more slowly than expected, XM may have difficulty reaching our current subscriber estimates. Furthermore, if there is a greater than expected increase in music industry royalties, XM may have trouble reaching our current estimates.