Merrill Lynch analyst Laraine Mancini issued a note today regarding the proposed A La carte pricing. Interestingly, the note touches on possible savings with the RIAA because a clear package value for music is established. Mancini also sees a 60% likliehood on the merger.
- Tiered offerings give more choice
SIRI and XMSR’s joint announcement of tiered subscriptions (conditional upon the success of the merger) benefits consumers who will pay lower prices for customized offerings. The new offerings include a 1.) 50 channel choice (starting at $6.99/mo--new radio required), 2.) 100 channel choice including content from SIRI and XM ($14.99/mo—new radio required), 3.) SIRI with best of XM or vice-versa ($16.99/mo--available on existing radios), 4.) family friendly with select SIRI/XM ($14.99/mo), 5.) family friendly within one service ($11.95/mo), 6.) mostly music ($9.99/mo), 7.) sports & talk ($9.99/mo), and 8.) the traditional 170 channel offering ($12.95/mo--unchanged). These new less expensive options should broaden satellite radio’s appeal and be looked upon favorably by the regulators when evaluating consumer benefits from the merger. In addition sports only and music only options could help to constrain royalty/content costs as a merged company should only pay royalty for subs that choose specific content.
- Merger or not shares look undervalued
We continue to believe the shares have upside using our reasonable and often conservative assumptions. In our view, shares are oversold as 1) the Street is assigning a 0% probability the deal will get approved and 2) lingering impact of concerns about retail market demand, long-term churn, and the rate of conversion of promotional subscribers to self-paying subs. We remain optimistic (60% probability) the merger with XMSR will be successful and believe it could close as early as late 4Q07 or 1Q08. We estimate the present value of future cost synergies to be$4.3bb ($1.40/SIRI share; $6.40/XMSR share) as the merged company migrates to a single platform. While we are not including this upside in our $5 price objective, we believe that any positive news flow regarding merger progress out of the DOJ and the FCC would be a positive catalyst for the stock.
Position - Long Sirius, Long XM