Several reports on satellite radio were issued today. Report discussions range from A La Carte Pricing, to Q2 estimates, to Panero stepping down. See excerpts from all seven reports below.
Merrill Lynch issued a note today on the resignation of XM CEO Hugh Panero
Panero steps aside
XM announced that CEO Hugh Panero will be leaving the Company in August. While no reason for his departure was revealed, Mr. Panero would have left following the closing of the proposed merger with SIRI (Mel Karmazin will serve
as CEO and Gary Parsons as Chairman of the merged company). In the interim, Nate Davis, President & COO, will serve as the CEO of XM. Mr. Davis assumed his role as COO in July 2006 (on the Board of Directors since 1999) and has
played a major role in refocusing efforts on improved customer satisfaction to control subscriber churn. Mr. Davis' experience will help guide XM until the merger outcome is determined.
Announcement should not affect stock
Although Mr. Panero was an asset to the Company and a visionary in the space, the Company is being left in capable hands. Given the interim leadership and the prospective merger, we do not expect a material impact to the stock based on this
JP Morgan issued a note today on XM’s Q2 preview which outline consensus numbers.XM Satellite Holdings Inc
2Q07 Preview: Laying Out Consensus ExpectationsIn this note, we are laying out consensus expectations on key metrics for XM Satellite Radio, which reports 2Q07 earnings pre-open on Thursday, July 26. We remind investors that our ratings and estimates are suspended on XM, as JPMorgan is a financial advisor to XM on its proposed merger with Sirius.
- Financial metrics:
Consensus revenue, EBITDA and EPS estimates stand at $275.4m, ($53.8m) and ($0.44), respectively.
- Subscriber metrics:
Based on information provided by XM, we believe the consensus expects subscriber additions of 330K-340K in 2Q07. SAC per gross add is expected to be around $68, while cost per gross addition (CPGA) is seen around $113. Churn is expected to tick up slightly from the 1.78% reported for 1Q07. Subscription ARPU is seen around $10.10, while total ARPU is seen around the $11 range.
Deutsche Bank issued the following on XM Satellite Radio:- Maintain Buys: no change yet to merger view, while fine-tuning TPsWe continue to see the merger as a 30-50% proposition, although based on recent statements by the companies we have more confidence in our estimate of c.$300m in annual run-rate synergies. We maintain our 2Q net subscriber addition estimate of 281k for XMSR - we believe upside to this number is likely muted by deteriorating trends at retail in June. We raise our SIRI 2Q net sub estimate to 477 from 401k, as OEM again appears stronger than expected. We rate both SIRI and XMSR Buys as plays on economical growth in satellite radio in U.S. vehicles.
- Retail continues to be weak, as model continues shift to OEM paradigm
We believe the satellite radio retail category is tracking down roughly 25% in 2Q. Coming out of 1Q reporting, we only expected 281k net subscriber additions for XM (down 29% YoY). While we expect XM to beat this estimate, we think the upside may be less than some anticipate, as June trends seem to have deteriorated. We have raised our estimate for 2Q net sub add growth for Sirius to 477k from 401k. We believe the more important, and positive, trend is in the OEM channel, where auto makers continue to increase installation rates, and where we believe conversion rates to self-paying status continue to be steady.
- See merger as 30-50% proposition, as merits shaded by politics
In our view, the odds of approval are relatively little changed from the time the deal was announced in February. While the stocks have rallied since their mid-June lows (XMSR up c.13% and SIRI up c.11%) on talk of higher implied odds of merger approval, we are not aware of any shifts in predisposition by the regulators regarding the deal. Despite the numerous comments now in the public record, we are still at a rather early stage in the review process (roughly 45 days into a 180-day FCC review process, for example, although the DOJ may arrive at a determination slightly sooner). Rather, we believe the market has largely been correcting an excessively bearish outlook on the deal. Of course, the 300 pages of FCC filings by the companies on Tuesday could have a positive impact. We do not see the upcoming departure of XMSR CEO Hugh Panero in August, announced Tuesday post-close, as having a material impact on the approval of the merger.
- Fine-tuning TPs: to $16 from $18 for XMSR and to $4 from $4.25 for SIRI
Based on a more detailed scenario analysis, we have fine-tuned our target prices for XMSR and SIRI. Our base case XMSR valuation uses a DCF with 14.4m XMSR subs by 2010, 30.2m by 2020, a 4% TVG and 13% WACC (resulting in c.$12 per
share standalone value) and merger analysis assuming $3.0bn in synergies and a 33% probability of deal completion with few material conditions. Our base caseSIRI valuation uses a DCF with 14.1m Sirius subs by 2010, 27.9m by 2020, a 4% TVG and 13% WACC (resulting in c.$3.75 per share standalone value) and merger analysis assuming $3.0bn in synergies and 40% probability of deal completion with few material conditions. Risks to both ratings include changing market for technology-driven businesses, subscriber growth volatility, competing technologies, rising costs, liquidity, and adverse legal developments (including failure to gain merger approval without materially adverse conditions).
Bear Stearns issued another note today as well for XM Satellite Radio:Interim Management Arrangement Likely to Continue- Nate Davis Named Interim CEO.
XM disclosed after market close that CEO Hugh Panero will leave the company in August; COO Nate Davis was named interim CEO. While Mr. Panero's departure has been anticipated by the market for some time now, it was expected that he would remain at the helm until March 2008. Recall that XM had recently extended his employment contract until March 2008, pending merger review.
- Interim Arrangement Likely to Continue.
Under the merger plan, Sirius CEO Mel Karmazin will become CEO of the combined company should the merger be approved. As such, we think the current arrangement likely will continue until the outcome of the merger review is known and XM believes it will remain an independent company on an ongoing basis.
- XM Reports 2Q Results 7/26 -- Key Estimates.
We are projecting gross adds of 950k, net adds at 323k (marginally higher than street at 310k), all-in churn of 2.6% (XM discloses paid churn, which we think would be 1.7%), CPGA at $114 (vs consensus of $112), sub revenues at $245 million (vs consensus of $243 million), and adjusted EBITDA of $(57) million. XM reports 2Q results on July 26, conference call at 10AM ET, call-in # 877-265-5808, conf ID# 6562974, webcast at www.xmradio.com.
- $15 YE 2007 Valuation.
Deutsche Bank had the following merger review note:We continue to believe merger overhang has overly weighed on the stock, creating attractive risk / reward levels. Further, we think that conservative fundamentals alone support our positive thesis; and while we believe the merger closing probability is higher than market sentiment, we think investors can still enter assuming the merger fails. Our $15 2007 target is predicated on a DCF that assumes no merger and therefore $0 in merger synergies. - At first blush, many good points, but questions remain
We have scanned the voluminous merger filings XM and Sirius made yesterday afternoon at the FCC. We start with the caveat that our review is incomplete at this stage, as we have not read the entirety of the filings and exhibits. The filings have numerous redactions, and thus even a complete review of them would not entirely convey what has been presented to the FCC. Thus, our purpose is to merely offer some first impressions, and not legal opinions. We will offer more comprehensive analysis at a later time.
- Substitutes vs degrees of competition
On the definition of the relevant market, we believe it would be helpful to see evidence on the degree of competition between various audio entertainment services. We ponder questions such as whether, if XM's satellites fell from the sky, its subscribers would be more likely to subscribe to Sirius or listen to terrestrial radio. It would seem the degree of substitutability would bear on the ability of one product/service to constrain price increases by another. We also believe that regulators will probably focus more on those services likely to have a substantial market impact in the next two years or so, as opposed to those that are unlikely (for technological or other reasons) to be substantially deployed.
- Commercial-free music still seems like a key feature of satellite radio to us
The Sirius-XM filing and the CRA International report attempt to minimize the importance of commercial-free music in defining the market by observing that a large majority of radio listeners do not value this feature enough to pay for satellite
radio. We are still trying to determine whether this implies that satellite radio is a small part of a larger radio market, or a larger part of a "premium" radio market catering to listeners who can't stand commercials in their music.
- "SSNIP" test: worth a closer look
We believe an important part of the regulatory analysis will be whether and how the so-called SSNIP ("small but significant and nontransitory increase in price") test, referenced in the Horizontal Merger Guidelines, is applied. The filings and CRA
exhibit discuss this in detail. In addition, comments already filed opposing the merger have noted that XM was able to impose an apparently nontransitory price increase to $12.95 from $9.99 in April 2005. The satellite radio filings argue this test is not as applicable to a growing industry like satellite radio that is not mature.
- Filings and exhibits detail numerous potential new competitors
The Sirius-XM filing, the CRA analysis and a report attached as exhibit F describe many of the new services, such as MediaFLO and Slacker, which could compete in the mobile audio market. CRA observes that there is unlikely to be a "tipping
point" where competition for satellite radio decreases (such as happened in the competition between word processors and typewriters, for example). While such discussion is hardly unexpected, and indeed seems important to making the case
for the merger, we believe the particular details could contribute to some negative investor sentiment.
Factoid: satellite radio penetration higher in smaller markets This relationship, intuitive but sometimes not made that clear, was found in a study by CRA. This is evidence of cross elasticity of demand between satellite and terrestrial radio, and thus the degree to which they are substitutes.
Other interesting factoids
- 28% of Americans over 12 (roughly 67m) own MP3 players.
- Per Jupiter Research, the number of MP3 players in use could increase by 60m by 2009.
Bear Stearns issued a second note today focusing on the Sirius and XM filing with the FCC:More Choices, Lower Prices: XM/Sirius Highlight Merger-Specific Consumer Benefits
• Companies Detail Plans on How They will Share the Benefits with Consumers.
XM and Sirius disclosed details of the new packages that consumers can expect to receive after the merger is approved. The following themes likely will resound in the FCC filing that is expected tomorrow (i) merger synergies allow sharing benefits with consumers, (ii) a la carte offerings possible for the first time in the media industry, (iii) more choices available to consumers, at lower prices, and including “best of” both, (iv) value proposition overwhelmingly good for consumers, and (v) substantial public interest benefits arising from the merger.
• Eight Post-Merger Packages Proposed - All Arising Solely from the Merger - Availability in Phases in 2008. Expect the Companies to Go Beyond Just Rebuttal and Discussion on Competition -- XM/Sirius' Reply Likely Will Contain Concrete Proposals on Public Benefits.
In the extensive reply comments that are expected to be filed with the FCC tomorrow, in addition to the details that were disclosed this morning, we expect both companies to (i) respond to the questions raised by the commentators petitioning the FCC to enjoin the merger, (ii) discuss efficiencies specifically arising out of the merger and how the companies plan to “share” the benefits with the consumers, and (iii) refute that satellite radio is a separate market operating outside of the larger market for audio entertainment.
• Implications for the Model.
While we haven't had the chance to run the assumptions through our models, we expect the ARPU in the merged model may be below our current assumptions, while sub growth will be higher and churn lower. Importantly, any sort of negative impact likely will be offset by the efficiencies arising from the merger.
• We Continue to Believe the Merger Likely Will be Approved on Merits.
Our opinion is in fact a vote of confidence in the FCC and DOJ, who we believe will base their decisions on what’s best for consumers and the American public.
MORE CHOICES, LOWER PRICES – XM AND SIRIUS HIGHLIGHT PUBLIC INTEREST AND MERGER-SPECIFIC BENEFITS
Companies Highlight Benefits from the Merger, and Detail Plans on How They will Share the Benefits with Consumers.
XM and Sirius disclosed details of the new packages, including pricing and potential channel choices, that consumers can expect to receive after the merger is approved. In their press release, the two companies highlighted the following themes which likely will resound in their FCC reply filing that is expected tomorrow (i) merger synergies allow the companies to share some of the benefits with the consumers, (ii) a la carte offerings possible for the first time in the media/entertainment industry, (iii) more choices will be available to consumers, at lower prices, and including the “best of” both the services, (iv) value proposition overwhelmingly good for consumers, and (v) substantial public interest benefits arising from the merger.
Eight Post-Merger Packages Proposed – All Arising Solely from the Merger – Availability in Phases in 2008.
In aggregate, the two companies will be offering eight post-merger package options to consumers (which we detail in the following exhibit), underscoring the companies’ commitment to maintain and enhance service to existing devices and to ensure that no consumer pays more after the merger for the service they currently enjoy. With the more extensive package choices, we believe the companies expect that (i) consumers who were staying on the sidelines, even without trying out the service, likely may find the service more appealing, which would increase the size of the overall target market, (ii) OEM consumers who did not convert into self-paying subscribers after trying the service on a trial basis, which will improve OEM conversion rates, and (iii) the improved value proposition will improve self-pay churn. We anticipate that the “Everything” packages will be available on existing radios by Father’s Day of 2008 assuming the merger is approved by YE 2007; the gating factors are getting the approvals of the programming partners, and incorporating the new packages into the billing and subscriber management systems. For the a la carte content, we think the companies may be able to deliver new receivers with modified chipsets into the retail shelves by YE 2008.
Stifel Nicholas offered the following comments highlighting the Chrysler Announcement that they will be installing Sirius in 70% of the vehicles they produce:- Chrysler moves toward standard:Sirius Satellite Radio announced this morning that Chrysler will install Sirius Satellite Radio in approximately 70% of its vehicle production for the 2008 model year. This marks an increase from approximately 40% in the 2007 model year.
- 70% rate is above our prior estimate:
We had been assuming a penetration rate at Chrysler of 50% for the 2008 model year. The move to 70% represents an increase of approximately 400k subscribers during the 2008 model time frame, based on Chrysler's production of about 2MM cars.
- Fundamental bull case is strengthened:
Chrysler is the first of the Big 4 auto makers (Ford, GM, Toyota) to move to a penetration rate at this level. This significantly strengthens our belief that satellite radio will eventually gostandard/near standard in cars, the crux of our bull thesis.
- For the first time in awhile, expect Street subscriber estimates to rise:
We plan to update our model and target price after Sirius 2Q earnings announcement on July 31st.
- Reiterate Buy on SIRI:
Our $4.75 target price on SIRI is based on a stand-alone value using 5-year DCF which assumes a 9.5x terminal multiple of EV/FCF and a 10% WACC. We view the merger likelihood at just under 50% (probability could change based on yesterday's 112-page FCC filing by XMSR/SIRI), and believe a much lower probability is priced into these stocks, giving shareholders an attractivley priced option on the merger.
Position - Long sirius, Long XM