Stanford Group issued a report today on XM Satellite Radio. The firm sees merger odds at about 40%, and has a "Hold" on the equity.

Report Excerpts:

XMSR: Retail woes persist.

XM will release second quarter 2007 results Thursday, July 26 before the market opens. We estimate XM may add 270,000 new net subscribers as retail additions remain soft.

Management will host a conference call at 10am Thursday, July 26 The dial-in number is 877-265-5808. We suspect “Street” estimates are calling for 310,000 net additions in the second quarter. Our estimated 270,000 net additions would bring total subscribers to 8.2 million, up 19% year over year.

Despite modest subscriber growth, XM could show decent financial performance. Revenue could be $271 million, up 19%, leading to an adjusted cash flow ebitda loss of $37 million. EPS loss may be $0.42, an improvement from a $0.87 loss a year ago.

XM has struggled with weak retail sales in the face of competition from Sirius. Sirius holds a retail market share advantage.

XM and Sirius have proposed a merger of equals. XM holders will receive 4.6 shares of Sirius stock for each XM share they hold. While a satellite radio merger could uncover substantial cost savings, it may take six months to hear from regulators and well into next year to start unlocking merger synergies.

The merger faces significant regulatory scrutiny from the Federal Communications Commission and the Department of Justice. Stanford policy analyst Paul Gallant believes there is a 60% chance the DOJ will sue to block the merger. The transaction is slated to close by year end.

For 2007, we project 1.3 million net subscriber additions bringing the total to 8.9 million, up 17%. Our 2007 revenue estimate is $1,111 million, up 19%, leading to adjusted ebitda loss of $178 million and an EPS loss of $1.80.

XM’s stock currently implies a valuation of roughly $600 for each 2007E subscriber and 5x 2007E revenue. By comparison, Sirius’ valuation implies about $700 per subscriber and 6x 2007E revenue. But, Sirius is growing subscribers and revenue substantially faster. Our valuation is based on the present value of future subscriber growth and free cash flow potential. Our target price is $10 per share.

We rate XM Satellite Radio a Hold

Position - Long Sirius, Long XM -IMOJB-