Tom Watts of Cowen issued a report today on the DOJ approval of the merger between Sirius and XM.
Wedding Bells At Last. DoJ Approves Merger. FCC Approval Expected Soon.
Conclusion: Yesterday, the DoJ approved the XMSR-SIRI merger, setting the stage for an FCC approval in the next few days, and a deal closing should happen immediately thereafter. On its Q4 call, SIRI indicated it would provide combined company guidance for FY08 following closing. We maintain our Outperform rating on both companies, and expect synergy guidance, plus visibility of 2009/2010 FCF, to drive continued N-T outperformance.
?Approval As Expected. Last February, when the deal was originally announced, we projected a 70% likelihood of approval -- a Street high. The DoJ's comments yesterday confirm our view that XMSR ($13.79) and SIRI ($3.15) operate in a broadly defined market which includes terrestrial radio, digital music players and other sources.
?FCC Concessions Likely to Be Small. With the DoJ process complete, we expect the FCC to announce its decision shortly. We expect approval of the merger, with several modest concessions consistent with proposals from both companies. These include price controls, a la carte program packages, and access to public interest programming.
?Integration to Begin Immediately. Given shareholder approval back in November, and the long-time each company has had to plan, integration should begin swiftly. We expect immediate savings from SAC and G&A. Renegotiation of deals with OEMs in the next few years could improve margins substantially. Ops improvements will take longer due to the different satellite technologies.
?FCF to Drive Valuation. We project 2010 FCF/shr of $0.22. SIRI should trade to >25x this number in the next 12-18 months. At the 4.6x exchange ratio, XMSR still trades at a 4.8% discount, creating a near-term opportunity
Tyler Savery Position - Long Sirius, Long XM