RBC Capital issued a note today relating to merger possibility and a-la-carte pricing. The note seems to show a conservative stance regarding how a merged company will realize synergies, citing what may be a lower ARPU, but not seeming to adjust for any change is adoption rate of SDARS.Report Excerpts:
Concession Will Likely Offset Some Synergies As XMSR/SIRI Offer More Concrete Insight Into Post Merger Pricing/Product Offerings
Merger Probability Is Improved, But There Are Probably Offsets To Synergies
We believe that in giving the FCC the safeguards that should greatly enhance probability of regulatory approval (potentially effectively lowering ARPU), XMSR and SIRI could also erode operating fundamentals, offsetting merger synergy values. Maintaining OP rating and $14 price-target.
We Believe A-La-Carte Pricing Plans Could Reduce ARPU by 5%.
Three of proposed eight a-la-carte pricing plans are above current subscription price of $12.95 and four are below it. We assume that plans closest in price to current $12.95 plan as well as the cheapest $6.99 plan should be the most popular. When we weight the prices based on our forecasted popularity, we arrive at an average price of $12.13 (we'd note that the equally weighted average of the plans is $11.81), 6.3% below the current $12.95 subscription price.
Probability Of Merger Increases As XMSR/SIRI Appear Willing To Quantify Concessions To FCC
Our regulatory sources have indicated since beginning of merger process that FCC Commissioner Martin might settle for bird in hand conditions setting favorable (for FCC) precedent such as establishment of a-la-carte pricing and family tiers, etc. as well as concrete consumer safeguards such as a commitment to lower pricing overall, rather than risk a controversial denial of proposed merger based on prohibition of a merger set forth by original 1997 DARS license grant.
But...Concessions That Likely Increase Probability of Merger Completion
Will Also Likely Erode Fundamentals And Offset Synergies
Our analysis indicates each ARPU reduction of 10% (a conservative estimate of the impact of introducing ala carte pricing) could counteract$2.6 billion of synergy NPV over the initial 7 year term ($1.3 bn attributed to XMSR/SIRI respectively). However each incremental 10% of increased probability of transaction closure equates to approximately $0.25bn billion of shareholder value (in a probability weighted basis) for XMSR shareholders.
Bottom Line Is That For Each 5-10% Of ARPU Decline, A >20-40% Increase In Probability of Merger is Required To Make Lower ARPU A Wash
We believe that on a blended basis, ARPU would likely decline roughly 5%, while probability of transaction completion would increase to 70%. Maintaining previous $14 probability weighted price-target.
Position - Long Sirius, Long XM -IMOJB-