Wall Street tuned in to XM, Sirius

Shares of sat radio firms rocket, but some question merger plans

A day after announcing they will merge if government regulators allow them to, shares of XM Satellite Radio and Sirius Satellite Radio soared 10.2% and 6%, respectively, and were among Tuesday's leaders on The Hollywood Reporter's Showbiz 50 stock index.

Some on Wall Street, however, are indicating that the easy money might already have been made. David Joyce of Miller Tabak + Co. said Tuesday that "merger speculation has pushed up the prices of both companies close to our near-term targets."

The analyst hasn't altered his view that Sirius will trade to $5 in the next year, while XM will climb to $18. Shares of Sirius closed Tuesday at $3.92, and XM shares closed at $15.41.

Wedbush Morgan Securities analyst William Kidd estimates that the merger premium is worth about $1.50 per XM share. If Wall Street figures there is a 40%-60% chance that the merger will gain regulatory approval, then XM should trade from $16.83-$18.26 per share and Sirius should trade from $4.06-$4.23.

"Even if approved, we expect it could take three to five years for many of the revenue synergies to be realized," he said.

Banc of America analyst Jonathan Jacoby reiterated those sentiments, estimating the companies will need to run independently for another three years or more before customers could be moved to a combined platform and automakers could switch to new satellite radio tuners, if need be.

Credit Suisse analyst Bryan Kraft also sees as much as $10 billion in synergies, though they "will take years to realize and we expect management to downplay revenue synergies over the next year in order to optimize their chances with regulators."

Officially, Kraft is modeling just $7 billion in synergies from a merged XM and Sirius, with $3 billion coming from revenue increases and $4 billion coming from cost savings.

The analyst said Tuesday that he calculates the mean average price of XM leading up to the closing of the merger, if there is to be one, will be $22.15, while the mean average share price of Sirius ought to be $4.85.

Merrill Lynch analyst Laraine Mancini changed her "neutral" rating on XM on Tuesday to "no rating" because she said the stock "will now trade based on its exchange ratio to Sirius."

Under the terms of the agreement, dubbed a merger of equals by the companies, Sirius will exchange 4.6 shares of its common stock for each share of XM. Sirius CEO Mel Karmazin and XM chairman Gary Parsons will retain those roles at the combined company.

Mancini estimates a cost savings of $400 million in fiscal-year 2008 for a merged Sirius-XM, with cost savings synergies of $4.3 billion during the next 10 years.

One cost that won't change much in the near term is marquee content because those deals already are locked up. Martha Stewart will cost Sirius $7.5 million annually until November 2009, while Oprah Winfrey costs XM $18.3 million until September 2009.

Bigger deals at Sirius include NASCAR ($21.5 million a year until November 2011) and the NFL ($28.6 million until February 2011). XM's biggest content deal is with Major League Baseball, which it will pay $60 million per year for rights until October 2015.

And the granddaddy of content-spending is Howard Stern, who is costing Sirius $100 million per year until December 2010.

Mancini guesses that Stern and the others aren't likely to re-up with a merged Sirius-XM at a reduced rate, and suggests that "miscellaneous content," like news, "is an area of opportunity." Sirius and XM already have deals with the major cable news providers.

"The combined company will be better capitalized to compete in the evolving audio media marketplace," she said, "and will be able to better focus on providing a compelling product to consumers instead of battling for market share."
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