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Morgan Stanley Reports on Merger Synergies

 April 08, 2008 01:00 PM
 


Benjamin Swinburne, and analyst for Morgan Stanley has issued a report on Sirius Satellite Radio. The report focuses on potential merger synergies.

REPORT EXCERPTS:

Sirius Satellite Radio 1Q08 Preview:

Lowering Sub Estimates at Both OEM and Retail

What's Changed

1Q08 OEM Net Adds From 370K to 315K1Q08
Retail Net Adds From 100K to 20K

Lowering Estimates at Both OEM and Retail:

We are reducing our FY08 subscriber growth outlook due to our growing expectations for weak a 1H08. Our FY08 cuts come both at the retail and OEM channels. At OEM, the slowing overall auto market in the U.S. and satellite radio's greater exposure to domestic auto sales are driving the lower estimates. At retail, we believe continued cannibalization from the OEM channel as well as consumer caution regarding product obsolescence post-merger are both likely pressuring results. We now forecast SIRI adding 1.56 mm net additions in '08 compared to 1.67 previously. While reducing our full-year estimates, we now also assume more back-end loaded subscriber growth. Our estimates imply a 32% YoY decline in net additions and a near 20% decline in retail gross additions.

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What's next:

Now that the DOJ approval is in, the FCC vote is all that is remaining. Following closing, investor focus will likely shift to the company's path to FCF as neither of the companies have achieved full-year FCF on a stand-alone basis. Key variables for the merged entity will be the impact of combined programming on the demand curve (manifested through both gross adds and churn) as well as any opportunity to lower the fixed cost base. We do not expect near-term cost savings from re-pricing OEM or programming contracts. This note includes an updated pro forma forecast using three separate operating scenarios for the merged entity.

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Trimming '08 Estimates, Assuming More Aggressive 2H08

We are again trimming our forecast for FY08 and assuming more back-end loaded subscriber growth for SIRI. In aggregate, we are reducing our FY08 gross and net additions estimates by approximately 160K and 110K, respectively. We are lowering our 1H08 estimates by approximately 270K net adds, but raising our 2H08 net adds forecast by 160K. Our revised full year estimates reflects our outlook for continued significant weakness at retail (FY08 estimated down 20% YoY compared to 15% previously) and ramping OEM contribution as radio build-in rates continue to improve. However, we have modestly reduced our gross adds expectation from Ford to 1.09 mm compared to 1.18 mm as we assume a modestly less aggressive ramp to the targeted 70% build-in rate. Our revised FY08 sub forecast has modestly lowered our full-year revenue estimate from $1.22 bn to $1.19 bn, while our adjusted operating loss estimate remains broadly unchanged at $198 mm.

Merger Clarity May Benefit Sub Growth

As detailed in the past, we continue to believe retail subscriber results have been impacted both by an aggressively ramping OEM channel- potentially biting into retail demand- as well as consumer confusion surrounding the pending merger's impact on SIRI and XMSR radios. We do not anticipate any operational/ capability issues with SIRI or XMSR radios should the merger be completed. While we continue to assume a material 28% slowdown in total net adds in 2H08 (compared to 12% previously), our 4Q08 estimate assumes a 30% decline in retail net adds compared to our 70% estimates for the first three quarters of the year.

More detail from this report is available to Sirius Buzz members in the Sirius Buzz Forums

Position - Long Sirius, Long XM, Unrelated business with Morgan Stanley


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