dollar signMiller Tabak analyst David Joyce has issued a report on Sirius Satellite Radio as well as XM Satellite Radio where he upgrades each equity from neutral to buy. Joyce places a short term price target of $3.50 on Sirius and a long term target of $4.50. For XM, Joyce has a target of $16. Tabak sees a lower merger synergy number than other analysts, but believes that Sirius and XM's latest drawback in price since DOJ approval is overdone.

REPORT EXCERPTS

XM Satellite Radio (XMSR) Merger with Sirius Satellite (SIRI) Still Requires FCC Approval, which May Have Consumer Protection Guarantee Conditions Attached (not likely to be onerous);

  • Upgrade XMSR to Buy and Reiterate $16 Target to Match SIRI Exchange Ratio-Based Target;
  • Upgrade SIRI to Buy, Reiterate ST $3.50 Target, LT $4.50 Target (includes Merger Synergies)

We are still betting that the pending merger of XM Satellite Radio (XMSR - $11.09 – Buy – Target $16) and Sirius Satellite Radio (SIRI - $2.55 – Buy – ST Target $3.50, LT Target $4.50)can take place with approval from the FCC with conditions that should not be too onerous. We are essentially upgrading both XMSR and SIRI to Buys from Neutrals on valuation, as XMSR has fallen 20% and SIRI 19% since the DOJ approved their merger. We believe potential value creation through at least $2.8 bn (NPV) of synergies is still intact.

The FCC was scheduled to meet for a regular Open Committee session yesterday on a variety of other topics that required a vote, but the meeting was canceled without explanation.

o Possibly there were agenda items that did not yet have the consensus that Chairman Kevin Martin was seeking, but another possibility is that they are busy trying to complete their XMSR/SIRI decision now that more than a week and a half has passed since the DOJ approved the merger.

o A hang-up could be on the specific conditions the FCC could require, in order to acquiesce to public interest groups such as Public Knowledge: a la carte pricing (which the companies announced last summer would be available by the middle of 2008); price freezes for possibly at least three years; allocation of channel capacity to non-commercial educational programming; and third-party receiver manufacturing capability. Other entities (Georgetown Partners, Media Access Project) want the ability to lease capacity to allow other competitors (including minority-owned) into the marketplace.

We are upgrading XMSR to Buy from Neutral as the merger-related exchange ratio parity gap is still roughly 6%, but there is 44% upside to our $16 target, which coincides with the exchange-ratio-based SIRI target (4.6 x our short-term SIRI target of $3.50 = $16.10).

Position - Long Sirius, XM