cowen.JPGCowen analyst Tom Watts issued a research report today on Sirius Satellite Radio. The report centers on the merger, and refinancing issues that the merger will bring. The analyst feels that the concerns surrounding the refinancing are overblown, and has an overweight rating on Sirius. Watts believes that the real overhang on the SDARS equities is XM’s puttable debt rather than FCC concessions.


Sirius Satellite Radio

Outperform (1)

April 22, 2008 Re-Fi Risk Overblown, Near-Term Resolution to Provide Upside

Conclusion: Concern over the re-financing of XM’s $1.031B in puttable debt has depressed SIRI shares 22% since DoJ approval of the merger. While some investors believe bondholders can push SIRI to the wall, we believe SIRI has palatable options and can convince bondholders to accept a reasonable settlement for their consent to the merger. This will be resolved prior to the closing of the deal. We expect a solution in the next few months at most, triggering a stock price spike upward.

XM Debt Has Change-of-Control Put. $1.031B of XM’s $1.481B of long-term debt has provisions that allow bondholders to put the debt back to XMSR at 101 in the event of a change-of-control. Concerns over re-financing this debt has both depressed SIRI and XMSR shares -22% since DoJ approval of their merger.

SIRI Could Raise New Debt if Necessary. Current market conditions have made capital raising challenging. However we believe SIRI could raise the necessary $1.04B (1.01 x $1.03B), potentially through priv. placements. As an example, we believe SIRI could raise $1B thru a convert with a coupon of <4% and a conversion price up 40%. This would actually reduce SIRI's interest costs by $60MM vs. the current bonds, with coupons of 9.75 - 10%.A Consent Agreement More Likely. We believe SIRI's CEO Mel Karmazin will personally appeal to bondholders, "selling" them on the merits of the deal, and the combined entity's improved credit. We expect bond holders to "sell" their put right to SIRI, for 3-5x the value of their put, or 103-105. An equity component to their consideration may be possible.Any Reasonable Agreement Likely to Be A Positive. XM's 6.1% gap to SIRI's offer is likely to close immediately following an agreement. SIRI shares could also return to pre-DoJ approval levels, implying 25% upside.Position - Long Sirius/XM