Good morning Member of the Committee and Guests.

 

My name is David Bank. I am the media and broadcasting equity research analyst for RBC Capital Markets responsible for coverage of both the satellite and traditional radio broadcasting Industries.

 

XM Satellite Radio and Sirius Satellite currently have a combined enterprise value including both debt and equity securities of approximately $11 billion and I hope to put the proposed XM and Sirius Merger into context with respect to issues that the capital markets are focused on. 

 

Of these issues, the first and foremost of them would be the potential synergies and subsequent savings that we believe are possible in an XM and Sirius Merger.  We estimate the value of these synergies to be somewhere between $5 billion and $6 billion dollars.

 

While it is unclear to us how, if at all, the combined entity might pass on savings and value creation to consumers, there are three primary constituencies that stand to benefit from the $5 - $6 billion of savings financially: 1) the employees of each of the companies as the viability of the combined entity becomes stronger, 2) the customers which could potentially benefit from greater innovation, more flexibility in pricing and a more diverse selection of content and 3) shareholders, who will see value creation from increased long-term earnings potential.

 

Synergies would likely arise in two fashions.  The first is rather straightforward and will stem from simply eliminating redundant network components, marketing costs and operating support functions.

 

The second is ultimately more difficult to quantify, but a clear driver, nonetheless.  It stems from a potential reduction in leverage that content providers (ie. Sports, Entertainment and News service) as well as automotive manufacturers previously exercised when XM and Sirius were bidding separately for content and distribution contracts.  These costs, extracted from XM and Sirius in the form of fixed payments, variable revenue share payments and subsidies, have been significant.

 

At the time most of the original agreements were signed, satellite radio technology was still in its infancy relative to consumer acceptance. Sirius and XM were very aggressively bidding against each other for content and distribution deals that were thought to be key to long-term survival against a broader competitive backdrop that included standard and HD terrestrial radio, iPods, entertainment over cell phones and Internet radio.  In essence the Industry was competing against itself, as well as alternative distribution platforms. In addition, the demand for satellite radio subscriptions, particularly on the retail side, was expected to be more robust than it ultimately turned out to be.

 

As an illustration of the change in the demand picture against a backdrop of higher fixed-costs, while our current expectation for year end 2010 subscribers for the combined Industry is approximately 26 million, our expectation for that figure in late 2004 and early 2005 when we first published estimates for year end 2010 subscribers was closer to 33 million, a discount of approximately 20%.

 

Synergies will not occur overnight, but rather over a period of years – with more expected to be realized in the later half of the initial five year period after a merger because most agreements that the auto manufacturers and content providers have entered into are relatively long-term – most will not expire till at least 2011.  In addition, in our view the proposed combined company will likely need to maintain two separate network operating architectures for several years as it continues to service existing customers.  The itemized details and timing of these synergies by line item can be seen our report dated January 12, 2007, entitled – XMSR and SIRI Should Act On The Urge To Merge…Now.

 

The bottom line is that, according to our estimates, these synergies could amount to value creation for XM and Sirius stockholders of approximately $8.00 and $1.73 per share, respectively, at the exchange ratio set forth in XM and Sirius merger agreement.  For further details on this analysis, please see our report of February 20, 2007 entitled, Wedding Bells Are Ringing For XMSR and SIRI.

 

These amounts would correspond to premiums on the current equity prices of XM and Sirius of approximately 66% and 60% respectively at Monday’s closing price – and this probably is the major focus of the capital markets.

 

We believe that the combined company will almost certainly have greater resources to invest in further technological innovation leading to a more rapid development of improved products than either company would on a standalone basis.  As for implementation, that will be up to management.

 

We believe that the satellite Industry is a viable one with or without this merger.  However, we would note that as competition is increasing for the mobile entertainment consumer, (as illustrated by the evolution of the iPod to the iPhone, broadcast audio and video over cell phones and MP3 integration into the automobile, broader adoption of over-the-air HD radio), we believe that the Industry would be in a much healthier and stronger position should the proposed merger occur.

 

In conclusion, I would like to note that RBC Capital Markets has at no time served as a financial advisor to either XM or Sirius.