Mill Tabak analyst David Joyce sees a buying opportunity due to the confusion of yesterdays trading, and rumors that sent both Sirius and XM down sharply.


XM Satellite Radio (XMSR-$13.21-Buy)
December 13, 2007
David C. Joyce, CFA
Miller Tabak + Co., LLC

Upgrading XM Satellite Radio (XMSR) to Buy from Neutral on Regulatory Review ‘Confusion’ Sell-Off; Reiterate $17 Target for XMSR, Sirius Satellite Neutral and $3.50 Target

We are upgrading XM Satellite Radio (XMSR-$13.21-Buy-Target $17) to Buy from Neutral and keeping our $17 price target, as both XMSR and its merger partner Sirius Satellite Radio (SIRI – $3.29 – Neutral – Target $3.50) fell in large-volume, late-day regulatory review ‘confusion’ that led deal arbitrageurs to unwind their positions, thereby widening the XMSR exchange ratio gap to parity from about 8.8% at the beginning of the day to 14.6% currently.

There is 29% potential upside to our $17 target for XMSR, and 14.6% potential upside to the current SIRI trading-level-driven 4.6:1 exchange ratio parity level of $15.13.

Even if there is no incremental regulatory risk to the merger being approved, it is our sense that the end-of-year bureaucratic backlog at the DOJ (which is being slowed further as we note below) and the FCC makes a year-end closing of the merger less likely, so the time value component of a deal arbitrage trade has to bring the value of the deal down now for perhaps a January closing.

In mid-afternoon yesterday, a stock news service published a report that two members of the House of Representatives Anti-Trust Committee had expressed concern about the DOJ review of the merger. Perhaps there was an information leak from the DOJ or somewhere else in DC, but wide-spread news of this regulatory development was not published until well after the markets closed.

Two Representatives, Conyers (D-Chair of the Antitrust Task Force) and Chabot (R), wrote a letter to Attorney General Michael Mukasey expressing concern that there were reports that the DOJ staff may be trying to rush the merger through before the AG can fully review it, and that the Assistant AG for Antitrust Barnett may possibly intend to grant approval to the merger over staff objections.

Congressmen have no official say in merger approvals – the DOJ does on antitrust grounds, then the FCC does on consumer interest grounds. We thought the likelihood of the DOJ approval was very high as far back as the late summer when the Whole Foods (WFMI – $41.35)/Wild Oats combination was finally allowed, as it was determined that the narrow definition of healthy food supermarkets, of which they are the only two chains (or the only two satellite radio companies in this case), was not the appropriate market-scope view – it should be all food retailers (all terrestrial radio (standard and HD), internet streaming radio, MP3 players, podcasts, etc.).

Position – Long Sirius, XM