Miller Tabak Upgrades Sirius and XM
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
Tyler,
I feel you are extremely naive relating to the current share price of SIRI and the short SIRI and long XM theory. The share prices of both companies are due to manipulation. If you really feel different about that you should not be speaking on this merger issue. Second, as SIRI continues to be naked shorted so is XM. To say to buy XM long is negligent when it is also being shorted. XM has dropped percenage wise lower than SIRI the past week or so. If you bought XM on your theory last week, you would be out of the 4.6 arb right now. Sirius will be free in every vehicle and you will pay for only premium stations and those that are commercial free. The long term plan is to extinct the terrestrial radio as we know it. Sat radios will be a standard in every vehicle. The ad revenue on the free side of the programing will be out of this world. Mel is not here to dick around just merging to losing companies and going further in to debt. He has a plan none of us know about. He is the media King. Further, many of us have been in this stock for years and have no plan of selling just to break even. If that was the case I would have sold at a loss and moved on as I’m sure many others would have also done. Again, I think you are naive to the future of this company and to those who have had invested blood, sweat and tears to just sell to break even. You never mentioned the possibilty of the merged company being sold or merging with say an Apple, Google, Verizon etc. This is a very high probability. You seem like the investor who you speak about in your segment who has been beaten down. You were way to negative and I am disappointed in your opinion. Keep your chin up and look through the negatives.
Sirius Investor….Thank You for the comment. Some items to note:
1. Of corse there is manipulation. these stocks are trading in a channel, and manipulation is quite easy. This happens with many equities. manipulation is a fact of life in the stock market.
2. The short SIRI and Long XM trade strategy is widely known, and utilized. I am not personally doing it, nor am i recommending it. It is just something that has been transpoiring. The play exists, and so long as the merger is approved there can be a virtually guaranteed “profit”. It seems like you are not seeing how that arb play works. If an investor were to have bought $1,000 of XM last monday (4-7-08) @ $11.91 and shorted $1,000 of SIRI @ $2.74.
BUY PLAY – 84 shares XM @ $11.91= $1,000 (cost)
SHORT PLAY – 365 shares @ $2.74 = $1,000 (in account)
Assume merger closed this friday
the 84 shares of XM would convert to 386 shares of SIRI. With SIRI at $2.48. those 386 shares of SIRI would have a value of $957 thus your long play is now down $43, but you still own 26 shares of Sirius.
The investor needs 365 shares to cover the short on SIRI, and now has 386 shares. Those 365 shares (that he once sold for $1,000) can now be covered for $905. He already has $1,000 in his account from the short sale. This strategy netted a $43 loss but 21 shares of sirius (value @ $52 with Sirius at $2.48) on the long XMSR position, and a $95 profit on the short SIRI position. All of this on virtually no cash outlay risk. If the trader liquidated all of the sirius shares, the net profit on the entire transaction is $104. Again, I am not recommending this, it is simply happening as a reality. A guaranteed profit on a trade is not naive. There is a limit to the profit, and it requires the merger to be consumated, but a bit over 10% guaranteed is not a bad play, and is fairly safe.
3. I believe in the sector and the companies. I am not upside down in these equities, and am holding them long term. I am simply outlining that the shorter term has many challenges that will keep somewhat of a lid on this stock. It is better to understand that than be naive to it.
4. I believe Mel has several potential plans that may include buyers. That is what Mel does and has always done. Mel makes moves.
I try to look at all sides of issues. I try to present various ways that thyings happen. I have some who say that I only point out the positive, and some who say I am too negative. I look at it as a realistic presentation for the short term. Will Sirius see $6 on merger news? IMO, not unless everything falls into place perfectly. It is merely my opinion though.