Sirius Opportunity in Satellite Radio

4/25 - "Either short sellers don't think a merger between Sirius (NASDAQ: SIRI) and XM Satellite (NASDAQ: XMSR) will happen, or they don't believe that the deal will save the two debt-laden companies. Short interest in Sirius rose 20.2 million shares for the period ending April 15 compared with March 31. Total shares sold short hit 157.9 million. Shares short in XM also pushed up 6.3 million to 22.7 million.

The bets may be smart ones. The delay in approving the deal at the FCC has probably made it less likely that the merger will get the green light."

"Subscriber growth rates at the two companies are slowing. Both also have negative net income. At this point, neither company has predicted when it might make a profit...Each has over $1 billion in long-term obligation to repay bonds and loans. In a poor credit environment, it is hard to see that paper getting refinanced at better rates...A new company, even with some cost savings, could have enough debt to sink it."

4/14 - "With this merger, there are many reasons to short. While shorting equities is something that I personally am not prone to do, I do understand the concept and the market. I simply make a choice not to short very often. Specific to the merger, there is an arbitrage play that potentially has a lot of people shorting Sirius (SIRI). The strategy is to go long XM (XMSR) and short Sirius (this strategy requires that the merger pass). If an investor were to do this, they will basically lock in the arbitrage spread upon the merge.

With the Department of Justice already having issued their decision, it is almost a foregone conclusion that the FCC will at some point follow suit. Thus, there are many who like the guaranteed spread, and short Sirius while going long XM.

Another short strategy that has existed for quite some time comes from those with convertible shares. They short the stock to lock in the spread on their convertible shares. Most convertible shares are held by institutions."

"Time on a merger decision is likely quite soon. This will have shorts considering when to lock in their profits, but with all of those safety nets in place, they can still have a measure of confidence. At this point, they are trying to call the bottom, and realistically, the bottom is quite near to current levels.

For those that think the merger will solve the short situation… there will be short traders who will also try to call the top of the pop on an FCC announcement, and the cycle can start again. The solution is solid company performance, and a clear demonstration the profits are happening sooner rather than later. "

4/24 - "...it seems unlikely that the FCC will vote on the
merger at its May 14 meeting. A ruling by late May or early
June could occur. We believe the FCC is highly likely to
approve the merger with relatively modest conditions."

"Sirius should report first quarter 2008 results in early May
showing 370,000 net new subscriber additions, down from 556,000 a year ago...Sirius could end the first quarter with 8.7 million subscribers, up 32% year over year. We anticipate the majority of subscriber additions will come from OEM automotive distribution. Sirius should continue to lead the satellite radio industry in terms of its subscriber growth rate, but growth has slowed...We forecast 2008 full year revenue of $1.2 billion and an oibda loss of $206 million. EPS may be a loss of $0.30."

"Sirius trades at 5x 2008E revenue and $531 per our 2008
subscriber estimate of 10.0 million. By comparison, XM’s valuation implies 4x 2008E revenue and $535 per subscriber. Our valuation is based on the present value of future subscriber growth and free cash flow potential."

"Our $3 price target reflects a more moderate near-term growth in satellite radio and more cautious view that merger synergies could take several years to meaningfully change the financials and valuation...We rate Sirius Satellite Radio a Hold."