Goldman Sachs analyst Mark Wienkes seems to have changed his tune on the odds of merger approval. Wienkes however still maintains a bearish outlook on SDARS as a whole, as indicated on his report on XMSR issued today. Prior to this report Goldman had a bearish outlook on the odds for approval. Goldman is now joining other analysts who also feel that DOJ approval is more likely than not, and that a decision could be happening in the near future.

REPORT EXCERPTS

XMSR

Deal approval imminent? Even so, will demand materially increase?

What's changed

Deal or no deal, we think the current aggregate valuation incorporates a view too close to optimal, e.g. DOJ and FCC approvals with few conditions and subsequently, near-certain realization of all potential synergies. While our channel checks now indicate that the DOJ is increasingly unlikely to block the merger, we believe the approval, or the expectation of, is likely to cause XMSR and SIRI shares to run and mark near-term highs, similar to how both stocks reacted upon deal announcement a year ago. Longer term, merged or unmerged, our outlook for satellite radio is cautious given our view of unrealistic cash flow expectations, and hence valuation risk.

Implications

Our downgrade on Dec. 4, 2007 of XMSR shares was driven by our perception of mismatched valuation relative to our view of the potential merger outcomes. Now, even at a lower stock price, we question the prices ascribed to the underlying businesses, and think the market implied $5bn in merger synergies is too high. Near-term valuations seem to be driven by hope for strength in OEM, minimal FCC conditions and achieving merger synergies. However, given the retail channel weakness and even with a la carte, we find it challenging to think of what might materially shift the long-run demand curve even in the event of a merger. Our continued negative sentiment is driven by our fundamental view that the valuations of XM & Sirius will realign with more realistic long-term cash flows.

Valuation

We maintain our 12-month $11.50 price target, using our DCF valuation.

Key risks

Unrestricted merger approval, execution and financial outperformance.

Impact on related securities

We view SIRI (Sell) shares as subject to the same merger valuation issues as XMSR shares coupled with a less favorable business model and trends

Position - Long Sirius, XM