Janco analyst April Horace has upgraded both Sirius and XM and did a line by line synergy analysis. The synergies, according to Horace come in at $4 Billion over the next six years. For Sirius, Horace upgraded from "market perform" to "accumulate". She has a standalone price target of $3.80 and a merged price target of $3.65. For XM the upgrade was from "accumulate" to "buy" with a standalone price target of $15.00 and an arb price target of $14.16. Horace also speculates that the merger will be approved.
Taking a Stab at What the Combined Company Would look Like:
Soon after the merger was announced, many of our competitors issued reports with projected cost synergies as high as $11 billion over a 5 year period. We remained on the sidelines when these reports were issued, as we didn’t believe the synergies were that great. However, after almost a year, when things have settled down, and it appears that the merger will be approved, we have decided to take a stab at what the combined company could, in fact, save on a line item by line item basis. Based upon our analysis, we believe the companies could save $4 billion over the next 6 years. Mel recently stated that the independent third party review found cost savings that were in excess of one of the company’s market caps (i.e., XMSR at $4.1 billion and SIRI at $5.25 billion). Our estimate ended up right on the low end. Factoring in the XMSR dilution, we would place a merged price target for SIRI at $3.65. As we are going to assume that the merger is eventually approved, we are upgrading SIRI to an Accumulate with a merged price target of $3.65 and upgrading XMSR to a Buy with a current arbitrage price target of $14.15.
Investors Continue to Wait with Anxiety:
Since the merger was announced almost a year ago, SIRI’s shares have declined 20% relative to the Dow;however, in the last week, SIRI has managed to outperform the Dow by approximately 10%. We believe the recent strength in share price relative to the Dow is due to market sentiment that SIRI will gain DOJ approval. It remains to be seen whether or not the DOJ approval will arrive before SIRI reports its financial results, sometime in the second half of February. There is a March 1st option that both companies may terminate the merger without penalty if they do not receive regulatory approval. We believe that the DOJ will make an announcement before March 1st, and that the companies will extend the March 1st date if they are still waiting for FCC approval.
2008 Vehicle Sales Forecasts All over the Map:
2007 vehicles sales ended at a five year low of 16.2 million. Some analysts are forecasting 2008 vehicle sales as low as 15 million, which would be the worst year since 1995; while some are hoping for 15.7 million. Recently, its been reported that the Detroit 3 plan to cut production by 12.1%, but many of the cuts in production appear to be aimed at the daily rental market. By contrast the Japanese OEM’s expect to ride out the recession. Honda plans to boost production by 1.9% and Nissan plans an 11% increase. Adding to the confusion, its been reported that dealers are preparing for the worst, and plan to stock fewer new cars and focus on selling used cars. While the Big 3 are cutting production, we think SIRI’s exposure is somewhat mitigated by the increase in vehicle penetration and the fact that they get paid when the vehicle is manufactured. We are currently forecasting a 500,000 unit increase in vehicle penetration for 2008 for a total of 3 million out of a possible 6 million units.
Valuation and Rating: On a stand alone basis, we value SIRI at $3.80 and XMSR at $15.00. These valuations are based upon a five year DCF utilizing a10% WACC and terminal growth rates of approximately 3.5%. Investors should note that the WACC utilized for the merged companies is 13%, which attempts to take into consideration higher execution risks, which also causes the merged price target to be slightly lower than the stand alone price targets.
Tyler Savery Position - Long Sirius, Long XM, No Position OEM's