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No. of Recommendations: 2

Citi analyst Tony Wible assumed coverage of satellite radio, and has opened up with an $8 price target on Sirius Satellite Radio (SIRI). The detailed report deals with the companies as a stand alone as well as with a merger. Wible sees a 70% chance of FCC approval on the merger.

The report is somewhat curious in the price targets for XM (XMSR). News wires are picking this up as an XM downgrade, when in fact, the assumption of the merger passing would have a much higher target for XM given the conversion ratio of 4.6 shares of Sirius for each share of XM.

Fresh and Simple Reasons for Success

Assuming Coverage of the Satellite Radio Industry

Staying Strong – Satellite radio should continue to change the audio entertainment industry and gain share as its proves to be fresh (no need to create play lists or buy MP3s), original, cost effective, and a simple way to access premium/long tail content that can not be supported via radio or MP3 models. Given the highly fixed cost base of the companies, we view the sub growth as the key driver of the stocks and we see the industry having up to 55 mil subs by 2011 (+33.3% CAGR).
Economy Hurts Near-Term Results — Our standalone estimates are generally below consensus reflecting economic weakness and lower auto production. The fixed cost leverage compounds top line weakness; however this should be more than offset by substantial merger benefits and increasing OEM penetration rates.
70% Merger Probability — We believe that the proposed merger between SIRI and XMSR will drive significant costs savings (we forecast $500 mil by 2010 or 13% of the expense base) and potential revenue synergies of another $400 mil.
Alternative Valuation Study — While we value SIRI and XMSR using a DCF we also looked at terminal cash flow per sub and EV per sub, which shows SIRI and XMSR could be valued in a best case up to $8 and $30 (or $10 for the combined company).
Buy SIRI; Hold XMSR — We rate SIRI Buy (1S) with an $8 target based on: 1) a 70% probability the deal closes and a $10.00 target and 2) a $2.25 stand-alone value. We rate XMSR Hold (2S) with a $12.25 target (assumes a 70% probability deal closes soon and SIRI trades at $3 at the close and a $9 standalone value).
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