As filed with the Securities and Exchange Commission on October 1, 2007

Registration No. 333-144845

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 3 TO

Form S-4

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

SIRIUS SATELLITE RADIO INC.

(Exact name of registrant as specified in its charter)

 

 

1221 Avenue of the Americas, 36th Floor

New York, New York 10020

(212) 584-5100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Patrick L. Donnelly

Executive Vice President, General Counsel & Secretary

Sirius Satellite Radio Inc.

1221 Avenue of the Americas, 36th Floor

New York, New York 10020

(212) 584-5100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

 

 

 

 

Approximate date of commencement of proposed sale of the securities to the public:  As soon as practicable after this registration statement becomes effective and all other conditions to the proposed merger described herein have been satisfied or waived.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further Amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

PRELIMINARY — SUBJECT TO COMPLETION — DATED OCTOBER 1, 2007

 

 

PROPOSED MERGER — YOUR VOTE IS VERY IMPORTANT

 

Each of the boards of directors of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. has approved a strategic merger, combining SIRIUS and XM in what we intend to be a “merger of equals.” We believe that the proposed merger will allow XM and SIRIUS to provide more choices for their respective subscribers and that the combined company will be better positioned to compete in the rapidly evolving audio entertainment marketplace.

 

XM and SIRIUS have entered into an agreement and plan of merger pursuant to which XM and SIRIUS will combine their businesses through the merger of XM with a newly formed, wholly-owned subsidiary of SIRIUS, with XM thereupon becoming a wholly-owned subsidiary of SIRIUS.

 

In the proposed merger, XM stockholders will receive 4.6 shares of SIRIUS common stock for each share of XM Class A common stock, referred to as XM common stock. This exchange ratio is fixed and will not be adjusted to reflect stock price changes prior to the closing. SIRIUS’ stockholders will continue to own their existing shares, which will not be affected by the merger. Upon completion of the merger, XM’s former stockholders will own approximately     % of the then outstanding SIRIUS common stock, based on the number of shares of SIRIUS and XM outstanding on          , 2007. The value of the merger consideration to be received in exchange for each share of XM common stock will fluctuate with the market price of SIRIUS common stock.

 

Based on the closing sale price for SIRIUS common stock on February 16, 2007, the last trading day before public announcement of the merger, the 4.6 exchange ratio represented approximately $17.02 in value for each share of XM common stock. Based on the closing sale price for SIRIUS common stock on          , 2007, the last trading day before the printing of this joint proxy statement/prospectus, which we refer to as this Proxy Statement, the 4.6 exchange ratio represented approximately $      in value for each share of XM common stock.

 

SIRIUS common stock is listed on the NASDAQ Global Select Market under the symbol “SIRI”. XM common stock is listed on the NASDAQ Global Select Market under the symbol “XMSR.” We urge you to obtain current market quotations for the shares of SIRIUS and XM.

 

Your vote is very important. The merger cannot be completed unless SIRIUS stockholders approve the amendment to SIRIUS’ certificate of incorporation and the issuance of SIRIUS capital stock in the merger and XM stockholders adopt the merger agreement. Each of XM and SIRIUS is holding a special meeting of its stockholders to vote on the proposals necessary to complete the merger. Information about these meetings, the merger and the other business to be considered by stockholders is contained in this Proxy Statement. We urge you to read this Proxy Statement carefully. You should also carefully consider the risk factors beginning on page 16.

 

Whether or not you plan to attend your respective company’s special meeting of stockholders, please submit your proxy as soon as possible to make sure that your shares are represented at that meeting.

 

The SIRIUS board of directors recommends that SIRIUS stockholders vote FOR the proposals to approve the amendment to SIRIUS’ certificate of incorporation and the issuance of SIRIUS capital stock in the merger, both of which are necessary to effect the merger.

 

The XM board of directors recommends that XM stockholders vote FOR the proposal to adopt the merger agreement.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the merger or determined if this Proxy Statement is accurate or complete. Any representation to the contrary is a criminal offense.

 

This Proxy Statement is dated          , 2007, and is first being mailed to stockholders of XM and SIRIUS on or about          , 2007.

ADDITIONAL INFORMATION

 

This Proxy Statement incorporates by reference important business and financial information about SIRIUS and XM from other documents that are not included in or delivered with this Proxy Statement. For a listing of the documents incorporated by reference into this Proxy Statement, see “Where You Can Find More Information”. This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference into this document through the Securities and Exchange Commission website at http://www.sec.gov or by requesting them in writing or by telephone at the appropriate address below:

 

 

By Telephone: (212) 584-5100

 

 

By Telephone: (202) 380-4000

 

You may also obtain documents incorporated by reference into this Proxy Statement by requesting them in writing or by telephone from MacKenzie Partners, Inc., SIRIUS’ proxy solicitor, or D.F. King & Co., Inc., XM’s proxy solicitor, at the following addresses and telephone numbers:

 

 

 

 

By Telephone: (800) 487-4870 (toll free)

 

To receive timely delivery of the documents in advance of the meetings, you should make your request no later than          , 2007.

 

VOTING ELECTRONICALLY OR
BY TELEPHONE

 

SIRIUS stockholders of record on the close of business on          , 2007, the record date for the SIRIUS special meeting, may submit their proxies by telephone or Internet by following the instructions on their proxy card or voting form. If you have any questions regarding whether you are eligible to submit your proxy by telephone or by Internet, please contact MacKenzie Partners, Inc. by telephone at (800) 322-2885 (toll free) or (212) 929-5500 (collect) or via email at proxy@mackenziepartners.com.

 

XM stockholders of record on the close of business on          , 2007, the record date for the XM special meeting, may submit their proxies by telephone or Internet by following the instructions on their proxy card or voting form. If you have any questions regarding whether you are eligible to submit your proxy by telephone or by Internet, please contact D.F. King & Co., Inc. by telephone at (800) 487-4870 (toll free) or via email at info@dfking.com.

 

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON                    , 2007

 

 

To the Stockholders of Sirius Satellite Radio Inc.:

 

A special meeting of stockholders of Sirius Satellite Radio Inc. will be held at          , on          , 2007 at   a.m., local time, for the following purposes:

 

1. To amend SIRIUS’ certificate of incorporation to increase the number of authorized shares of SIRIUS common stock (the “Charter Amendment”).

 

2. To approve the issuance of SIRIUS common stock, par value $0.001 per share, and SIRIUS Series A convertible preferred stock, par value $0.001 per share, a new series of SIRIUS preferred stock, pursuant to the Merger Agreement, dated as of February 19, 2007, by and among Sirius Satellite Radio Inc., Vernon Merger Corporation and XM Satellite Radio Holdings Inc., as the same may be amended from time to time (the “Share Issuance”).

 

3. To approve any motion to adjourn or postpone the special meeting to a later date or dates, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting.

 

4. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

 

Proposals 1 and 2 are conditioned on each other and approval of each is required for completion of the merger.

 

The accompanying Proxy Statement further describes the matters to be considered at the meeting. A copy of the merger agreement has been included as Annex A to the Proxy Statement.

 

The SIRIUS board of directors has set          , 2007 as the record date for the special meeting. Only holders of record of SIRIUS common stock at the close of business on          , 2007 will be entitled to notice of and to vote at the special meeting and any adjournments or postponements thereof. Any stockholder entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote on such stockholder’s behalf. Such proxy need not be a holder of SIRIUS common stock. To ensure your representation at the special meeting, please complete and return the enclosed proxy card or submit your proxy by telephone or through the Internet. Please vote promptly whether or not you expect to attend the special meeting. Submitting a proxy now will not prevent you from being able to vote at the special meeting by attending in person and casting a vote.

 

The SIRIUS board of directors recommends that you vote FOR the proposal to amend SIRIUS’ certificate of incorporation to increase the number of authorized shares of common stock, FOR the proposal to approve the issuance of SIRIUS common stock and SIRIUS Series A convertible preferred stock in the merger and FOR the proposal to approve any motion to adjourn or postpone the special meeting to a later date or dates if necessary to solicit additional proxies.

By Order of the Board of Directors,

 

 

PATRICK L. DONNELLY
Executive Vice President, General Counsel and Secretary
New York, New York

 

          , 2007

 

PLEASE VOTE YOUR SHARES PROMPTLY.  YOU CAN FIND INSTRUCTIONS FOR VOTING ON THE ENCLOSED PROXY CARD. IF YOU HAVE QUESTIONS ABOUT THE PROPOSALS OR ABOUT VOTING YOUR SHARES, PLEASE CALL MACKENZIE PARTNERS, INC. AT (800) 322-2885 (TOLL FREE) OR (212) 929-5500 (COLLECT) OR VIA EMAIL AT PROXY@MACKENZIEPARTNERS.COM.

 

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON          , 2007

 

 

To the Stockholders of XM Satellite Radio Holdings Inc.:

 

A special meeting of stockholders of XM Satellite Radio Holdings Inc. will be held at          , on          , 2007 at          a.m., local time, for the following purposes:

 

1. To adopt the Merger Agreement, dated as of February 19, 2007, by and among Sirius Satellite Radio Inc., Vernon Merger Corporation and XM Satellite Radio Holdings Inc. as the same may be amended from time to time.

 

2. To approve any motion to adjourn or postpone the special meeting to a later date or dates, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

 

3. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

 

The accompanying Proxy Statement further describes the matters to be considered at the special meeting. A copy of the merger agreement has been included as Annex A to this Proxy Statement.

 

The XM board of directors has set          , 2007 as the record date for the special meeting. Only holders of record of shares of XM common stock at the close of business on          , 2007 will be entitled to notice of and to vote at the special meeting and any adjournments or postponements thereof. To ensure your representation at the special meeting, please complete and return the enclosed proxy card or submit your proxy by telephone or through the Internet. Please vote promptly whether or not you expect to attend the special meeting. Submitting a proxy now will not prevent you from being able to vote at the special meeting by attending in person and casting a vote.

 

The board of directors of XM recommends that you vote FOR the proposal to adopt the merger agreement and FOR the proposal to approve any motion to adjourn or postpone the Special Meeting to a later date or dates if necessary to solicit additional proxies.

 

By Order of the Board of Directors,

 

 

Gary M. Parsons
Chairman of the Board of Directors

 

          , 2007

 

PLEASE VOTE YOUR SHARES PROMPTLY.  YOU CAN FIND INSTRUCTIONS FOR VOTING ON THE ENCLOSED PROXY CARD. IF YOU HAVE QUESTIONS ABOUT THE PROPOSALS OR ABOUT VOTING YOUR SHARES, PLEASE CONTACT D.F. KING & CO., INC. BY TELEPHONE AT (800) 487-4870 (TOLL FREE) OR VIA EMAIL AT INFO@DFKING.COM.

 

Table of Contents

 

 

 

 

 

The following questions and answers briefly address some commonly asked questions about the SIRIUS and the XM special meetings. They may not include all the information that is important to stockholders of XM and SIRIUS. We urge stockholders to read carefully this entire Proxy Statement, including the annexes and the other documents referred to herein.

 

 

 

 

 

 

 

 

 

 

 

 

 

The Merger

 

Consideration to be Received in the Merger by XM Stockholders

 

Treatment of Stock Options and Other Stock-based Awards

	•	receipt of the required stockholder approvals;
	•	receipt of NASDAQ authorization for listing of SIRIUS common stock to be issued in the merger or reserved for issuance upon exercise of converted XM equity awards;
	•	receipt of FCC approval for the merger;
	•	expiration or termination of the waiting period under U.S. antitrust laws;
	•	receipt of any other required regulatory approvals;
	•	the SEC declaring effective the registration statement, of which this Proxy Statement is a part, and the registration statement not being subject to any stop order or threatened stop order;
	•	no injunctions, restraints, legal restraints or prohibitions preventing the consummation of the merger;
	•	no action taken by any governmental entity, or other circumstance, which imposes any restriction upon SIRIUS or the combined company which would have a material adverse effect on SIRIUS after the effective time of the merger;
	•	accuracy of the other party’s representations and warranties in the merger agreement, including their representation that no material adverse change has occurred;
	•	the other party’s compliance with its obligations under the merger agreement; and
	•	receipt of opinions of counsel relating to the U.S. federal income tax treatment of the merger.

	•	solicit, initiate, encourage or knowingly facilitate any acquisition proposal;
	•	participate in any discussions or negotiations regarding, or furnish to any person any confidential information in connection with, or knowingly facilitate any effort or attempt to make or implement, an acquisition proposal; or
	•	approve or recommend, or enter into, any letter of intent, merger agreement, option agreement or other similar agreement related to any acquisition proposal or propose or agree to do any of the foregoing.

	•	by mutual written consent of SIRIUS and XM; or
	•	by either party, if:

	•	a governmental entity that must grant a requisite regulatory approval has denied approval of the merger and the denial has become final and non-appealable, or any governmental entity issues an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the merger, and such order, decree, ruling or other action has become final and non-appealable;
	•	the merger is not consummated on or before March 1, 2008;
	•	the other party breached any of the agreements or representations in the merger agreement, in a way that the related condition to closing would not be satisfied, and this breach is either incurable or not cured within 45 days;
	•	the required approval by the stockholders of SIRIUS or XM has not been obtained at the respective stockholders meeting or any adjournment or postponement thereof; or
	•	the board of directors of the other party changes its recommendation that its stockholders vote in favor of the merger.

 

Matters to be Considered at the Special Meetings

 

SIRIUS

	•	to amend SIRIUS’ certificate of incorporation to increase the number of authorized shares of SIRIUS common stock in connection with the merger, which is referred to in this Proxy Statement as the Charter Amendment;
	•	to approve the issuance of SIRIUS common stock, par value $0.001 per share, and a new series of SIRIUS preferred stock in the merger, which is referred to in this Proxy Statement as the Share Issuance;
	•	to approve any motion to adjourn or postpone the SIRIUS special meeting to another time or place, if necessary, to solicit additional proxies; and
	•	to conduct any other business that properly comes before the SIRIUS special meeting or any adjournment or postponement thereof.

 

XM

	•	to adopt the merger agreement, which is referred to in this Proxy Statement as the Merger Proposal;

	•	to approve any motion to adjourn or postpone the XM special meeting to another time or place, if necessary, to solicit additional proxies; and
	•	to conduct any other business that properly comes before the XM special meeting and any adjournment or postponement thereof.

 

Voting by SIRIUS and XM Directors and Executive Officers

 

SELECTED HISTORICAL FINANCIAL DATA OF SIRIUS

																						Six Months Ended
		Year Ended December 31,																				June 30,
		2002				2003				2004				2005				2006				2006				2007
		(In thousands, except per share amounts)
Statements of Operations Data:
Total revenue		$	805			$	12,872			$	66,854			$	242,245			$	637,235			$	276,742			$	430,464
Loss from operations			(313,127	)			(437,530	)			(678,304	)			(829,140	)			(1,067,724	)			(676,641	)			(257,645	)
Net loss(1)			(422,481	)			(226,215	)			(712,162	)			(862,997	)			(1,104,867	)			(696,372	)			(278,892	)
Net loss applicable to common stockholders(1)			(468,466	)			(314,423	)			(712,162	)			(862,997	)			(1,104,867	)			(696,372	)			(278,892	)
Net loss per share applicable to common stockholders (basic and diluted)		$	(6.13	)		$	(0.38	)		$	(0.57	)		$	(0.65	)		$	(0.79	)		$	(0.50	)		$	(0.19	)
Weighted average common shares outstanding (basic and diluted)			76,394				827,186				1,238,585				1,325,739				1,402,619				1,395,549				1,459,701
Balance Sheet Data:
Cash and cash equivalents		$	18,375			$	520,979			$	753,891			$	762,007			$	393,421			$	534,963			$	424,749
Marketable securities			155,327				28,904				5,277				117,250				15,500				48,625				4,654
Restricted investments			7,200				8,747				97,321				107,615				77,850				108,315				78,160
Total assets			1,340,940				1,617,317				1,957,613				2,085,362				1,658,528				1,811,396				1,688,272
Long-term debt, net of current portion			670,357				194,803				656,274				1,084,437				1,068,249				1,083,929				1,281,742
Accrued interest, net of current portion			46,914				—				—				—				—				—				—
Preferred stock			531,153				—				—				—				—				—				—
Accumulated deficit			(927,479	)			(1,153,694	)			(1,865,856	)			(2,728,853	)			(3,833,720	)			(3,425,225	)			(4,112,612	)
Stockholders’ (deficit) equity(2)			36,846				1,325,194				1,000,633				324,968				(389,071	)			(57,123	)			(539,476	)

(1)		Net loss and net loss applicable to common stockholders for the year ended December 31, 2003 included other income of $256,538 related to our debt restructuring.
(2)		No cash dividends were declared or paid in any of the periods presented.

 

SELECTED HISTORICAL FINANCIAL DATA OF XM

		Year Ended December 31,																				Six Months Ended June 30,
		2002				2003				2004				2005				2006				2006				2007
		(In thousands, except per share amounts)
Statements of Operations Data:
Total revenue		$	20,181			$	91,781			$	244,443			$	558,266			$	933,417			$	435,852			$	541,387
Loss from operations			(438,780	)			(454,458	)			(461,041	)			(555,535	)			(403,098	)			(202,453	)			(196,037	)
Net loss			(495,012	)			(584,535	)			(642,368	)			(666,715	)			(718,872	)			(378,330	)			(298,185	)
Net loss applicable to common stockholders(1)			(515,871	)			(604,880	)			(651,170	)			(675,312	)			(731,692	)			(383,048	)			(298,185	)
Net loss per share applicable to common stockholders (basic and diluted)		$	(5.95	)		$	(4.83	)		$	(3.30	)		$	(3.07	)		$	(2.70	)		$	(1.47	)		$	(0.97	)
Weighted average common shares outstanding (basic and diluted)			86,735				125,176				197,318				219,620				270,587				259,866				306,155
Balance Sheet Data:
Cash and cash equivalents		$	32,818			$	418,307			$	717,867			$	710,991			$	218,216			$	431,087			$	275,392
Marketable securities			—				—				—				23,006				5,860				5,985				7,938
Restricted investments			29,742				4,151				4,492				5,438				2,098				2,658				196
Total assets			1,160,280				1,526,782				1,821,635				2,223,661				1,840,618				2,147,594				1,812,958
Long-term debt, net of current portion			412,540				743,254				948,741				1,035,584				1,286,179				1,341,066				1,476,720
Preferred stock			119				114				60				60				54				55				54
Accumulated deficit			(885,986	)			(1,470,521	)			(2,112,889	)			(2,779,604	)			(3,498,476	)			(3,157,934	)			(3,796,661	)
Stockholders’ (deficit) equity(2)			592,311				532,888				336,163				80,948				(397,880	)			(185,938	)			(659,861	)

(1)		Net loss applicable to common stockholders includes stock dividends and retirement losses relating to Series B and C preferred stock.

(2)		No cash dividends were declared or paid in any of the periods presented.

 

SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

		Year Ended				Six Months Ended
		December 31,				June 30,
		2006				2007
		(In thousands, except per share amounts)
Statements of Operations Data:
Total revenue		$	1,570,652			$	971,851
Loss from operations			(1,598,489	)			(517,515	)
Net loss			(1,925,506	)			(637,290	)
Net loss applicable to common stockholders			(1,938,326	)			(637,290	)
Net loss per share applicable to common stockholders (basic and diluted)		$	(0.73	)		$	(0.22	)
Weighted average common shares outstanding (basic and diluted)			2,663,151				2,901,898

		As of
		June 30,
		2007
		(In thousands)
Balance Sheet Data:
Cash and cash equivalents		$	700,141
Marketable securities			12,592
Restricted investments			78,356
Total assets			10,263,300
Long-term debt, net of current portion			2,774,792
Preferred stock			25
Accumulated deficit			(4,112,612	)
Stockholders’ equity			5,037,958

 

COMPARATIVE PER SHARE DATA (UNAUDITED)

		As of and				As of and
		For the Year				For the Six
		Ended				Months Ended
		December 31,				June 30,
		2006				2007
Sirius Satellite Radio Inc.
Loss from continuing operations per common share — basic and diluted		$	(0.79	)		$	(0.19	)
Book value per share			(0.27	)			(0.37	)
Cash dividends			—				—
XM Satellite Radio Holdings Inc.
Loss from continuing operations per common share — basic and diluted		$	(2.70	)		$	(0.97	)
Book value per share			(1.30	)			(2.15	)
Cash dividends			—				—
Sirius Satellite Radio Inc. Pro Forma Combined
Loss from continuing operations per common share — basic and diluted		$	(0.73	)		$	(0.22	)
Book value per share			N/A				1.75
Cash dividends			—				—
XM Satellite Radio Holdings Inc. Pro Forma Equivalent(1)
Loss from continuing operations per common share — basic and diluted		$	(3.36	)		$	(1.01	)
Book value per share			N/A				8.05
Cash dividends			—				—

(1)	XM Satellite Radio Holdings Inc. pro forma equivalent amounts are calculated by multiplying pro forma combined per share amounts by the exchange ratio of 4.6.

		SIRIUS
		Common Stock								XM Common Stock
		High				Low				High				Low
2005
First Quarter		$	7.85			$	5.13			$	38.28			$	27.99
Second Quarter			6.80				4.42				34.83				26.16
Third Quarter			7.61				6.20				37.31				32.57
Fourth Quarter			7.98				5.70				36.91				26.99
2006
First Quarter			6.82				4.36				30.46				19.66
Second Quarter			5.57				3.60				24.21				12.77
Third Quarter			4.77				3.62				14.98				9.63
Fourth Quarter			4.37				3.50				16.08				9.91
2007
First Quarter			4.26				3.18				17.70				12.80
Second Quarter			3.25				2.66				13.04				10.37
Third Quarter (through September 28, 2007)			3.59				2.71				15.03				10.50

	•	statements relating to the benefits of the merger, including anticipated synergies and cost savings estimated to result from the merger;
	•	statements relating to future business prospects, number of subscribers, revenue, income and financial condition; and
	•	statements preceded by, followed by or that include the words “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target” or similar expressions.

	•	the ability to obtain governmental approvals of the merger on the proposed terms and time schedule, and without the imposition of significant terms, conditions, obligations or restrictions;
	•	the risk that the businesses will not be integrated successfully;
	•	expected cost savings from the merger may not be fully realized within the expected time frames or at all;
	•	revenues following the merger may be lower than expected;
	•	the effects of vigorous competition in the markets in which SIRIUS and XM operate;
	•	an adverse change in the ratings afforded to debt securities by rating agencies or a lower rating afforded to the combined company’s debt securities;
	•	the possibility of one or more of the markets in which XM and SIRIUS compete being impacted by changes in political or other factors such as monetary policy, legal and regulatory changes or other external factors over which they have no control;
	•	the ability of the combined company to obtain debt financing on terms favorable to it or at all, whether to complete any required repurchase of outstanding debt or otherwise;
	•	changes in general economic and market conditions; and
	•	other risks referenced from time to time in filings with the SEC and those factors listed or incorporated by reference into this Proxy Statement under “Risk Factors” beginning on page 16.

 

In addition to the other information contained or incorporated by reference into this Proxy Statement, you should carefully consider the following risk factors in deciding how to vote on the merger. In addition, you should read and consider the risks associated with each of the businesses of SIRIUS and XM because these risks will also relate to the combined company. Certain of these risks can be found in the documents incorporated by reference into this Proxy Statement.

 

Because the market price of SIRIUS common stock will fluctuate, XM stockholders cannot be sure of the market value of the SIRIUS common stock that they will receive.

 

When we complete the merger, shares of XM common stock will be converted into the right to receive 4.6 shares of SIRIUS common stock. The exchange ratio is fixed and will not be adjusted for changes in the market price of either SIRIUS common stock or XM common stock. The merger agreement does not provide for any price-based termination right. Accordingly, the market value of the shares of SIRIUS common stock that SIRIUS grants and XM stockholders will be entitled to receive when we complete the merger will depend on the market value of shares of SIRIUS common stock at the time that we complete the merger and could vary significantly from the market value on the date of this Proxy Statement or the date of the XM special meeting. The market value of the shares of SIRIUS common stock will continue to fluctuate after the completion of the merger. For example, during the first and the second calendar quarters of 2007, the market price of SIRIUS common stock ranged from a low of $2.66 to a high of $4.26, all as reported on the NASDAQ Global Select Market. See “Market Prices and Dividends and Other Distributions” on page 14.

 

These variations could result from changes in the business, operations or prospects of XM or SIRIUS prior to or following the merger, regulatory considerations, general market and economic conditions and other factors both within and beyond the control of SIRIUS or XM. We may complete the merger a considerable period after the date of the SIRIUS special meeting and the XM special meeting.

 

The issuance of shares of SIRIUS common stock to XM stockholders in the merger will substantially reduce the percentage interests of SIRIUS stockholders.

 

If the merger is completed, SIRIUS will issue up to approximately 1.7 billion shares of SIRIUS common stock in the merger. Based on the number of shares of SIRIUS and XM common stock outstanding on the SIRIUS and XM record dates, XM stockholders before the merger will own, in the aggregate, approximately     % of the fully diluted shares of common stock immediately after the merger, excluding shares issuable upon conversion of XM’s outstanding convertible debt. The issuance of shares of SIRIUS common stock to XM stockholders in the merger and to holders of assumed options and restricted stock units to acquire shares of XM common stock and warrants will cause a significant reduction in the relative percentage interest of current SIRIUS stockholders in earnings, voting, liquidation value and book and market value.

 

Uncertainty about the merger and diversion of management could harm XM, SIRIUS or the combined company, whether or not the merger is completed.

 

In response to the announcement of the merger, existing or prospective subscribers, retailers, radio manufacturers, automakers and programming providers of XM or SIRIUS may delay or defer their purchasing or other decisions concerning XM or SIRIUS, or they may seek to change their existing business relationship. In addition, as a result of the merger, current and prospective employees could experience uncertainty about their future with XM or SIRIUS or the combined company. These uncertainties may impair each company’s ability to retain, recruit or motivate key personnel. Completion of the merger will also require a significant amount of time and attention from management. The diversion of management attention away from ongoing operations could adversely affect ongoing operations and business relationships.

Failure to complete the merger for regulatory or other reasons could adversely affect SIRIUS and XM stock prices and their future business and financial results.

 

Completion of the merger is conditioned upon, among other things, the receipt of certain regulatory and antitrust approvals, including from the Federal Communications Commission and under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval of SIRIUS and XM’s stockholders. There is no assurance that we will receive the necessary approvals or satisfy the other conditions to the completion of the merger. Failure to complete the proposed merger would prevent SIRIUS and XM from realizing the anticipated benefits of the merger. Each company will also remain liable for significant transaction costs, including legal, accounting and financial advisory fees. In addition, XM and Hugh Panero, XM’s former CEO, agreed to end his employment in August 2007 and, consequently, Mr. Panero will receive severance payments and benefits pursuant to his employment agreement. The cash payments under the employment agreement will be approximately $4.9 million in the aggregate. These payments are not conditioned upon the completion of the merger. Also, Nathaniel Davis, XM’s President, is currently serving as interim Chief Executive Officer of XM, but XM may have to select a permanent replacement for Mr. Panero if the merger is not completed. In addition, the market price of each company’s common stock may reflect various market assumptions as to whether the merger will occur. Consequently, the completion of, or failure to complete, the merger could result in a significant change in the market price of SIRIUS and XM’s common stock.

 

Any delay in completion of the merger may significantly reduce the benefits expected to be obtained from the merger.

 

In addition to the required regulatory clearances and approvals, the merger is subject to a number of other conditions beyond the control of XM and SIRIUS that may prevent, delay or otherwise materially adversely affect its completion. See “The Merger — Regulatory Approvals Required for the Merger” beginning on page 47 and “The Merger Agreement — Conditions to Completion of the Merger” beginning on page 56. XM and SIRIUS cannot predict whether and when these other conditions will be satisfied. Further, the requirements for obtaining the required clearances and approvals could delay the completion of the merger for a significant period of time or prevent it from occurring. Any delay in completing the merger may significantly reduce the synergies and other benefits that SIRIUS and XM expect to achieve if they successfully complete the merger within the expected timeframe and integrate their respective businesses.

 

The ability to complete the merger is subject to the receipt of consents and approvals from government entities, which may impose conditions that could have an adverse effect on SIRIUS or XM or could cause either party to abandon the merger.

 

In deciding whether to grant regulatory or antitrust approvals, the relevant governmental entities will consider the effect of the merger on competition within their relevant jurisdictions. The terms and conditions of the approvals that are granted may impose requirements, limitations or costs or place restrictions on the conduct of the combined company’s business.

 

The merger agreement may require us to accept significant conditions from regulatory bodies before either of us may refuse to close the merger on the basis of those regulatory conditions. Neither XM nor SIRIUS can provide any assurance that either company will obtain the necessary approvals or that any other conditions, terms, obligations or restrictions will not have a material adverse effect on the combined company following the merger. In addition, we can provide no assurance that these conditions, terms, obligations or restrictions will not result in the delay or abandonment of the merger. See “The Merger — Regulatory Approvals Required for the Merger” beginning on page 47 and “The Merger Agreement — Conditions to Completion of the Merger” beginning on page 56.

 

The anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected.

 

The merger involves the integration of two companies that have previously operated independently with principal offices in two distinct locations. Due to legal restrictions, SIRIUS and XM have conducted only limited

planning regarding the integration of the two companies. The combined company will be required to devote significant management attention and resources to integrating the two companies. Delays in this process could adversely affect the combined company’s business, financial results, financial condition and stock price. Even if SIRIUS and XM were able to integrate their business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from this integration or that these benefits will be achieved within a reasonable period of time.

 

Additionally, as a condition to their approval of the merger, regulatory agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the combined company’s business. If SIRIUS and XM agree to these requirements, limitations, costs, divestitures or restrictions, the ability to realize the anticipated benefits of the merger may be impaired.

 

Because certain directors and executive officers of XM and SIRIUS have interests in seeing the merger completed that are different than those of XM’s and SIRIUS’ other stockholders, these persons may have conflicts of interest in recommending that XM and SIRIUS stockholders vote to approve the merger agreement.

 

Certain directors of XM and SIRIUS have arrangements or other interests that provide them with interests in the merger that are different than those of XM’s or SIRIUS’ other stockholders. For example, Mel Karmazin, the CEO of SIRIUS, who is also a director of SIRIUS, will, pursuant to the merger agreement, keep that title with the combined company and will remain on the board of directors of the combined company and Gary Parsons, the Chairman of XM, will become chairman of the board of directors of the combined company. In addition, up to six current XM directors and up to four SIRIUS directors may serve on the combined company’s board. While other XM and SIRIUS directors will not become directors of the combined company after the merger, in either case, SIRIUS will indemnify and maintain liability insurance for each of the directors’ services as directors before the merger. In addition, XM’s executive directors and one executive officer of SIRIUS have change in control severance protections that would entitle them to enhanced severance if their employment were to terminate following the merger under specific circumstances. In addition, SIRIUS has employment agreements with each of its executive officers, which contain provisions regarding payments upon a termination of employment. These and other material interests of the directors and executive officers of XM and SIRIUS in the merger that are different than those of the other XM and SIRIUS stockholders are described under “The Merger — Interests of Directors and Executive Officers in the Merger” beginning on page 43.

 

The merger agreement contains provisions that could discourage a potential competing acquiror that might be willing to pay more to acquire XM or that may be willing to acquire SIRIUS.

 

The merger agreement contains “no shop” provisions that restrict SIRIUS’ and XM’s ability to solicit or facilitate proposals regarding a merger or similar transaction with another party. Further, there are only limited exceptions to SIRIUS’ or XM’s agreement that their respective board of directors will not withdraw or adversely qualify its recommendation regarding the merger agreement. Although each of the SIRIUS and XM boards are permitted to terminate the merger agreement in response to a superior proposal if they determine that a failure to do so would be inconsistent with their fiduciary duties, its doing so would entitle the other party to collect a $175 million termination fee from the other party. In addition, if a third party publicly makes a proposal for a competing transaction with either SIRIUS or XM before the special meeting and its stockholders do not approve the merger, that party will be required to pay the other party a portion of the termination fee. We describe these provisions under “The Merger Agreement — Termination” beginning on page 59 and “— Termination Fees and Expenses” beginning on page 60.

 

These provisions could discourage a potential competing acquiror from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher value than that proposed to be paid in the merger, or might result in a potential competing acquiror proposing to pay a lower per share price than it might otherwise have proposed to pay because of the added expense of the termination fee.

In connection with the merger, a substantial amount of XM indebtedness may need to be refinanced.

 

In connection with the merger, an offer to repurchase a significant portion of XM’s outstanding notes at 101% of the principal amount thereof may be required under the terms of such debt. Any required repurchase would likely be financed with other debt and, due to prevailing conditions in the debt markets, debt financing to fund such repurchase may not be available on terms favorable to the combined company or at all. At June 30, 2007, the aggregate principal amount of XM’s outstanding notes was approximately $1.5 billion, and no outstanding notes were trading above 101% of the outstanding principal amount. We believe that if the notes are trading above 101% at the time of any required repurchase offer, a large majority of holders would be unlikely to sell their notes in the repurchase offer. Moreover, SIRIUS may consider repurchasing outstanding debt in connection with the merger. Any repurchase would likely be financed with other debt. At June 30, 2007, the aggregate principal amount of SIRIUS’ long-term debt was approximately $1.3 billion.

 

The combined company’s indebtedness following the completion of the merger will be substantial. This indebtedness could adversely affect the combined company in many ways, including by reducing funds available for other business purposes.

 

The pro forma indebtedness of the combined company as of June 30, 2007, after giving effect to the merger, would have been approximately $2.8 billion. As a result of this debt, demands on SIRIUS’ cash resources may increase after the merger. The increased levels of indebtedness could reduce funds available for investment in research and development and capital expenditures or create competitive disadvantages compared to other companies with lower debt levels. In addition, existing covenants in the SIRIUS and XM debt instruments limit the transfer of cash between the two companies and require that inter-company dealings be effected on an arm’s-length basis, which may affect the timing or amount of synergies realized from the integration of the two companies.

 

Resales of shares of SIRIUS common stock following the merger and additional obligations to issue shares of SIRIUS common stock may cause the market price of SIRIUS common stock to fall.

 

As of June 30, 2007, SIRIUS had approximately 1.46 billion shares of common stock outstanding and approximately 164 million shares of common stock subject to outstanding options and other rights to purchase or acquire its shares. SIRIUS currently expects that it will issue approximately 1.70 billion shares of SIRIUS common stock in connection with the merger. The issuance of these new shares of SIRIUS common stock and the sale of additional shares of SIRIUS common stock that may become eligible for sale in the public market from time to time upon exercise of options (including a substantial number of SIRIUS options that will replace existing XM options) could have the effect of depressing the market price for shares of SIRIUS common stock.

 

The trading price of shares of SIRIUS common stock after the merger may be affected by factors different from those affecting the price of shares of XM common stock or shares of SIRIUS common stock before the merger.

 

When we complete the merger, holders of XM common stock will become holders of SIRIUS common stock. The results of operations of SIRIUS, as well as the trading price of SIRIUS common stock, after the merger may be affected by factors different from those currently affecting SIRIUS’ or XM’s results of operations and the trading price of XM common stock. For a discussion of the businesses of XM and SIRIUS and of certain factors to consider in connection with those businesses, see the documents incorporated by reference into this Proxy Statement and referred to under “Where You Can Find More Information” beginning on page 97.

 

The following is a discussion of the merger and the material terms of the merger agreement between SIRIUS and XM. You are urged to read carefully the merger agreement in its entirety, a copy of which is attached as Annex A to this Proxy Statement and incorporated by reference herein.

 

Representatives of XM and SIRIUS first discussed the possibility of a business combination in late 2002 and early 2003, when XM and SIRIUS were experiencing certain financial challenges and were in the process of restructuring their respective debt and equity capital structures. However, XM and SIRIUS were unable to agree on a basis to proceed with discussions, and, as a result, those discussions were abandoned.

 

In February 2006, Mel Karmazin, the CEO of SIRIUS, contacted Gary M. Parsons, the Chairman of XM, to propose a meeting on a variety of topics of interest to the two companies and, on March 6, 2006, Mr. Karmazin met with Mr. Parsons and Hugh Panero, the CEO of XM at that time. As part of this meeting, Mr. Karmazin explored with Messrs. Parsons and Panero their interest in a possible business combination. Mr. Karmazin discussed in general terms why a combination would make sense from a business and financial perspective for the two companies and their stockholders. Messrs. Parsons and Panero agreed to reflect on the possibility of entering into discussions regarding a business combination, and indicated that they would raise the possibility of merger discussions with the XM board of directors. The XM board of directors was informed of the possibility of merger discussions with SIRIUS in March of 2006.

 

No further substantive discussions were held until September 21, 2006, when Mr. Karmazin and David Frear, the Executive Vice President and Chief Financial Officer of SIRIUS, met with Messrs. Parsons and Panero and Joseph Euteneuer, the Executive Vice President and Chief Financial Officer of XM. At this meeting, Mr. Karmazin reiterated SIRIUS’ interest in exploring a business combination with XM and generally discussed the possibility and benefits of entering into a discussion to combine their operations.

 

Messrs. Karmazin and Frear again met with Messrs. Parsons and Panero on October 17, 2006. Mr. Parsons expressed an interest in pursuing further discussions, provided there was a reasonable probability that required regulatory approvals for a business combination would be secured. As part of this meeting, SIRIUS and XM agreed to discuss with their respective counsel the likelihood of obtaining the required regulatory approvals for a combination. In the following weeks, SIRIUS had several discussions with its outside legal counsel, Simpson Thacher & Bartlett LLP and Wiley Rein LLP, about potential regulatory issues and received an initial assessment of these matters from both counsel.

 

On October 19, 2006, Messrs. Parsons and Panero briefed the XM board of directors on their meetings with SIRIUS, and recommended that XM retain the law firms of Jones Day and Latham and Watkins LLP to provide an assessment of potential antitrust and FCC issues, respectively. In the following weeks, XM had several discussions with its outside legal counsel about potential regulatory issues. On November 15, 2006, the XM board received an initial assessment of regulatory issues from outside counsel, and Messrs. Parsons and Panero recommended that XM engage an investment banking firm to evaluate the merits of a possible combination. Mr. Parsons described for the XM board the investment banking firms with whom he had already met and the concurring recommendation of the Finance Committee of the XM board of directors.

 

In late November 2006, Messrs. Parsons, Panero and Euteneuer met with representatives of JPMorgan to discuss engaging JPMorgan to act as financial advisor to XM to evaluate the merits of a possible combination and to assist in discussions regarding a possible transaction with SIRIUS. During the following weeks, representatives of XM and JPMorgan met a number of times to review financial information regarding a combined XM and SIRIUS.

 

In early December 2006, Mr. Karmazin briefed the SIRIUS board of directors on his upcoming meeting with management of XM and his desire to engage an investment banking firm, and described for the SIRIUS board the investment banking firms with whom he had already met. At this meeting, the SIRIUS board of directors authorized Mr. Karmazin to engage an investment banking firm to act as its financial advisor in connection with a possible combination. On December 8, 2006, Messrs. Karmazin and Frear and Andreas Lazar, the Senior Vice President of Business Development of SIRIUS, met with representatives of Morgan Stanley, to discuss engaging Morgan

Stanley to act as financial advisor to SIRIUS in discussions of a possible transaction with XM. On December 14, 2006, Messrs. Karmazin, Frear and Lazar met with Morgan Stanley to discuss the financial aspects of a possible merger with XM. On December 15, 2006, JPMorgan presented its initial analysis to the XM board of directors and representatives of Jones Day and Latham and Watkins presented an analysis of the regulatory issues to the XM board of directors. At various times following this meeting, Mr. Parsons updated the board of directors of XM individually on the status of discussions between the companies. On December 18, 2006, Messrs. Karmazin, Frear and Lazar again met with Morgan Stanley to review financial information regarding a combined SIRIUS and XM.

 

On December 19, 2006, Messrs. Karmazin, Frear and representatives of Morgan Stanley met with Messrs. Parsons, Panero and Euteneuer of XM and representatives of JPMorgan to present their ideas regarding the possible structure of a combination with XM. At this meeting, Mr. Karmazin proposed that SIRIUS and XM enter into discussions regarding a stock-for-stock transaction on a “merger of equals” basis.

 

On January 11, 2007, representatives of JPMorgan and Morgan Stanley met to discuss assumptions regarding the calculation of the relative equity values of XM and SIRIUS.

 

On January 23, 2007, Mr. Karmazin discussed with the SIRIUS board of directors management’s views regarding a possible business combination with XM, conversations between the respective financial advisors to XM and SIRIUS and expectations of XM regarding business valuations. After legal counsel reviewed with the SIRIUS board of directors the corporate and regulatory process anticipated in connection with a possible business combination with XM, the SIRIUS board of directors discussed at length the regulatory environment and potential challenges associated with seeking approval of a business combination with XM as well as the potential benefits and challenges of operating a combined enterprise.

 

On January 29, 2007, Mr. Karmazin and representatives of Morgan Stanley met with Mr. Parsons and representatives of JPMorgan to discuss a merger of SIRIUS and XM, including the materials that each side would review in refining a proposal and analyzing the potential benefits of a business combination. On February 1, 2007, JPMorgan provided additional analysis to the XM board of directors.

 

On February 8, 2007, Mr. Karmazin met with Mr. Parsons and Jack Shaw and Jeff Zients, members of the board of directors of XM, representatives of JPMorgan and representatives of Morgan Stanley. Mr. Karmazin and Mr. Parsons discussed a possible transaction whereby SIRIUS and XM would seek to negotiate a business combination on the basis of an exchange ratio of 4.6 shares of SIRIUS common stock for each share of XM common stock. Mr. Karmazin and Mr. Parsons agreed that each of SIRIUS and XM would commence detailed due diligence and contract negotiations promptly. At this meeting, the participants also reviewed financial models for a consolidated business and discussed various other matters. Mr. Karmazin, together with SIRIUS’ financial and legal advisors, discussed these developments with the SIRIUS board at a telephonic meeting on February 9, 2007. The SIRIUS board requested that management continue discussions with XM and promptly begin negotiating the financial terms of a possible merger.

 

The following day, members of senior management of SIRIUS and XM and their respective financial advisors met telephonically to discuss how to proceed with the merger negotiations and to finalize details relating to their respective due diligence reviews. Around this time, SIRIUS , through its legal advisor Simpson Thacher, delivered a draft merger agreement to XM through XM’s legal advisor, Skadden, Arps, Slate, Meagher & Flom LLP. During the following week, XM and SIRIUS and their respective representatives and advisors completed their due diligence reviews and negotiated the substantive terms and conditions of the merger agreement. Significant areas of negotiation included the scope and degree of reciprocity of representations and warranties and interim operating covenants, the conditions to closing, the terms upon which XM or SIRIUS could consider an alternative acquisition proposal and the process for dealing with any such proposal, the amount and triggers for payment of termination fees and various benefit and employee related provisions.

 

The SIRIUS board held a lengthy telephonic meeting on February 18, 2007, and received reports from management on the status of discussions with XM and from its outside legal counsel about the negotiations on terms of the merger agreement. Simpson Thacher reviewed with the SIRIUS directors their fiduciary duties in connection with considering and approving the merger agreement. The SIRIUS board of directors discussed with SIRIUS management and Simpson Thacher and Wiley Rein the regulatory approvals that would be necessary to complete

the merger. At that meeting, Morgan Stanley rendered its opinion that, as of the date of the meeting and based upon and subject to the factors, assumptions, matters, procedures, limitations and qualifications set forth in such opinion, the exchange ratio pursuant to the merger agreement was fair, from a financial point of view, to SIRIUS. At the February 18, 2007 SIRIUS board meeting, the SIRIUS board of directors unanimously determined, among other things, that the merger agreement and the merger contemplated thereby are advisable and in the best interest of SIRIUS and its stockholders, authorized the issuance of shares in the merger, resolved that the amendment to the SIRIUS certificate of incorporation to increase the number of authorized shares was advisable and in the best interest of SIRIUS and its stockholders and resolved to recommend that SIRIUS stockholders approve the share issuance and the amendment to SIRIUS’ certificate of incorporation.

 

The XM board held a lengthy telephonic meeting on February 18 and held another telephonic meeting on February 19, 2007. At such meetings, the XM board of directors received reports from management on the status of the discussions with SIRIUS, and received reports from its financial and legal advisors about the terms of the merger agreement. Skadden, Arps reviewed with the XM directors their fiduciary duties in connection with considering and approving the merger agreement. The XM board discussed with XM management and outside legal counsel, Jones Day and Latham & Watkins, the regulatory approvals that would be necessary to complete the merger. At the February 18, 2007 XM board of directors meeting, JPMorgan rendered its oral opinion that, as of the date of the meeting and based upon and subject to the factors, assumptions, matters, procedures, limitations and qualifications set forth in such opinion, the exchange ratio to be received by the holders of XM shares in the merger was fair, from a financial point of view, to such holders. JPMorgan subsequently confirmed its oral opinion by delivering its written opinion, dated February 20, 2007, to the board of directors of XM. At the February 19, 2007 XM board of directors meeting, the XM board of directors unanimously, with the XM director appointed by General Motors and the XM director appointed by American Honda each abstaining, determined that the merger agreement and the merger contemplated thereby are advisable and in the best interest of XM and its stockholders, approved, adopted and authorized the merger agreement, and resolved to recommend that XM stockholders adopt the merger agreement. The XM directors appointed by each of General Motors and American Honda abstained from voting with respect to the proposed merger, with the consent of the other XM directors, given XM’s and SIRIUS’ commercial and other arrangements with various automakers, including General Motors and American Honda.

 

Shortly after the conclusion of the XM board of directors meeting on February 19, 2007, SIRIUS, XM and Merger Sub executed and delivered to each other the merger agreement.

 

Reasons for the Merger

 

Both SIRIUS and XM believe that there are substantial potential strategic and financial benefits of the proposed merger of equals. This section summarizes the principal potential strategies and financial benefits that the parties expect to realize in the merger. For a discussion of various factors that could prohibit or limit the parties from realizing some or all of these benefits, see “Risk Factors” beginning on page 16.

 

Each of XM and SIRIUS believes that the merger will enhance stockholder value through, among other things, enabling SIRIUS and XM to capitalize on the following strategic advantages and opportunities:

 

competitive and rapidly evolving audio entertainment marketplace. In addition to existing competition from free “over-the-air” AM and FM radio as well as iPods and mobile phone streaming, satellite radio faces challenges from the rapid growth of HD Radio, Internet radio and next generation wireless technologies. In addition, cost reductions resulting from the combination of SIRIUS and XM will enable satellite radio to maintain competitive prices for subscription and devices.

 

 

The merger is also expected to foster the commercial introduction of interoperable satellite radios. In originally implementing rules for the satellite radio service, the FCC required SIRIUS and XM to develop designs for a radio capable of receiving the signal of either system. In accordance with this requirement, SIRIUS and XM created a jointly funded engineering team that has developed radios that are interoperable with each other’s networks. After the transaction is consummated, the marketplace itself will provide economic incentives to encourage further innovation and the subsidization and commercial distribution of interoperable radios. With appropriate subsidies to lower the costs, radio manufacturers would likely shift some amount of production, consistent with customer demand, to fabricating radios that tune to all channels of the combined service. Eventually, such radios are expected to enable the combined company to offer enhanced content and services.

 

 

The actual synergistic benefits from the merger and costs of integration could be different from the foregoing estimates and these differences could be material. Accordingly, there can be no assurance that any of the potential benefits described above or included in the factors considered by the SIRIUS board of directors described under “— SIRIUS Board of Directors’ Recommendation” beginning on page 24 or by the XM board of directors described under “— XM Board of Directors’ Recommendation” beginning on page 25 will be realized. See “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” beginning on pages 16 and 15, respectively. In connection with the proposed merger, both companies prepared and provided certain non-public, forward-looking information to their respective financial advisors to assist in the evaluation of the financial terms of the

merger. A selected subset of this information was shared between XM and SIRIUS through their respective financial advisors in connection with such evaluation. Neither SIRIUS nor XM considered this information to be material in its negotiation of an appropriate exchange ratio and the respective board’s decision to approve the merger and recommend the merger to its stockholders.

 

SIRIUS Board of Directors’ Recommendations

 

At a meeting on February 18, 2007, the SIRIUS board of directors (i) determined that the merger and entering into the merger agreement are advisable and in the best interest of SIRIUS and its stockholders, (ii) approved the merger and the merger agreement and the transactions contemplated thereby, including the Charter Amendment and the Share Issuance, and (iii) determined to recommend that the holders of SIRIUS common stock vote FOR the Charter Amendment and FOR the Share Issuance.

 

In connection with the foregoing actions, the SIRIUS board of directors consulted with SIRIUS’ management, as well as SIRIUS’ financial advisor and outside legal counsel and considered the following factors and risks in addition to the specific reasons described above under “— Reasons for the Merger”:

 

 

 

In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, the SIRIUS board of directors did not find it useful to and did not attempt to quantify, rank or otherwise assign relative weights to these factors.

 

In addition, the SIRIUS board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate determination, but rather the SIRIUS board of directors conducted an overall analysis of the factors described above, including discussions with the management team and outside legal and financial advisors. In considering the factors described above, individual members of the SIRIUS board of directors may have given different weight to different factors.

 

XM Board of Directors’ Recommendation

 

On February 19, 2007, the XM board of directors (i) determined that the approval of the merger agreement and the transactions contemplated thereby, including the merger, are in the best interests of XM and its stockholders, (ii) approved and adopted the merger agreement and the transactions contemplated thereby and (iii) resolved to recommend the adoption of the merger agreement to the stockholders of XM.

 

In reaching this conclusion, the XM board of directors consulted with XM’s management, as well as its financial advisor and outside legal counsel, and considered the following factors in addition to the specific reasons described above under “— Reasons for the Merger” beginning on page 22:

 

 

 

The XM board of directors also identified and considered a number of uncertainties, risks and other potentially negative factors, including the following:

 

 

The XM board recommends that XM common stockholders vote FOR the Merger Proposal.

 

In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, the XM board of directors did not find it useful to and did not attempt to quantify, rank or otherwise assign relative weights to these factors. The XM board of directors conducted an overall analysis of the factors described above, including discussions with the management team and outside legal, financial and accounting advisors. In considering the factors described above, individual members of the XM board of directors may have given different weight to different factors.

 

Opinion of Financial Advisor to the SIRIUS Board of Directors

 

SIRIUS retained Morgan Stanley to provide financial advisory services and a financial fairness opinion to the board of directors of SIRIUS in connection with the merger. The board of directors selected Morgan Stanley to act as its financial advisor based on Morgan Stanley’s qualifications, expertise, reputation and knowledge of the business of SIRIUS. At the special meeting of the SIRIUS board of directors on February 18, 2007, Morgan Stanley rendered its oral opinion, subsequently confirmed in writing as of the same date, that based upon and subject to the assumptions, qualifications and limitations set forth in the opinion, the exchange ratio pursuant to the merger agreement was fair from a financial point of view to SIRIUS.

 

The full text of Morgan Stanley’s written opinion, dated February 18, 2007, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations of the reviews undertaken in rendering its opinion, is attached as Annex B to this Proxy Statement. The summary of Morgan Stanley’s fairness opinion set forth in this Proxy Statement is qualified in its entirety by reference to the full text of the opinion. Stockholders should read this opinion carefully and in its entirety. Morgan Stanley’s opinion is directed to the board of directors of SIRIUS, addresses only the fairness from a financial point of view of the exchange ratio pursuant to the merger agreement to SIRIUS as of the date of the opinion, and does not address any other aspect of the merger. Morgan Stanley’s opinion does not constitute a recommendation to any stockholder of SIRIUS as to how such stockholder should vote with respect to the merger. In addition, this opinion does not in any matter address the prices at which SIRIUS common stock will trade following the consummation of the merger.

 

In connection with rendering its opinion, Morgan Stanley, among other things:

 

 

In arriving at its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information supplied or otherwise made available to it by XM and SIRIUS for the purposes of its opinion. As indicated in the following summary of the material financial analyses performed by

Morgan Stanley in connection with the preparation of its opinion, Morgan Stanley reviewed various financial and operational metrics included in financial projections with respect to both SIRIUS and XM, including projections with respect to XM which were made available to Morgan Stanley by or on behalf of XM. The principal XM metrics utilized by Morgan Stanley in its financial analyses included subscribers, revenues, EBITDA (or adjusted operating (loss)/income) and free cash flow. With respect to the financial projections, including information relating to certain strategic, financial and operational benefits anticipated from the merger, Morgan Stanley assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of XM and SIRIUS. In addition, Morgan Stanley assumed, in all respects material to its analysis, that the merger will be consummated in accordance with the terms set forth in the merger agreement without any waiver, amendment or delay of any terms or conditions, including, among other things, that the merger will be treated as a tax-free reorganization pursuant to the Internal Revenue Code of 1986, as amended. Morgan Stanley assumed that in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the proposed merger, no delays, limitations, conditions or restrictions will be imposed that would have a material adverse effect on the contemplated benefits expected to be derived in the proposed merger. Morgan Stanley relied upon, without independent verification, the assessment by the managements of XM and SIRIUS of: (i) the strategic, financial and other benefits expected to result from the merger; (ii) the timing and risks associated with the integration of XM and SIRIUS; (iii) their ability to retain key employees of XM and SIRIUS, respectively; and (iv) the validity of, and risks associated with, XM and SIRIUS’ existing and future technologies, intellectual property, products, services and business models. Morgan Stanley is not a legal, tax or regulatory advisor and has relied upon, without independent verification, the assessment of SIRIUS and XM and their legal, tax and regulatory advisors with respect to such matters. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of XM, nor was it furnished with any such appraisals. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to us as of, February 18, 2007. Events occurring after February 18, 2007, may affect Morgan Stanley’s opinion and the assumptions used in preparing it, and Morgan Stanley did not assume any obligation to update, revise or reaffirm its opinion.

 

The following is a summary of the material financial analyses performed by Morgan Stanley in connection with its oral opinion of February 18, 2007 and the preparation of its written opinion of the same date. Some of these summaries include information in tabular format. In order to understand fully the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the analyses.

 

XM Historical Share Price Analysis

 

To provide background information and perspective with respect to the relative historical share prices of XM, Morgan Stanley reviewed the stock price performance and trading volumes of XM during various periods ending on February 16, 2007.

 

Morgan Stanley noted that the range of low and high closing prices of XM common stock during the 52-week period ending on February 16, 2007 was approximately $10 to $24, during the 90-day period ending on February 16, 2007 was approximately $13 to $17 and during the 30-day period ending on February 16, 2007 was approximately $13 to $17. Morgan Stanley noted that the merger consideration as of February 16, 2007 was valued at $17.02 per share of XM common stock. The $17.02 merger consideration was calculated by multiplying the fixed transaction exchange ratio of 4.60 by the February 16, 2007 closing share price for SIRIUS common stock of $3.70 per share.

 

Morgan Stanley next compared the transaction exchange ratio of 4.60 and implied merger consideration value of $17.02 per share of XM common stock implied by the closing share prices of XM and SIRIUS shares of common stock as of February 16, 2007 of $13.98 per share and $3.70 per share, respectively, with historical exchange ratios

and XM share prices for the 90-day period ending on February 16, 2007. The following table lists the implied exchange ratio and share price premiums represented by the merger consideration during the selected periods:

 

 

 

 

SIRIUS Share Price Analysis

 

To provide background information and perspective with respect to the relative historical share prices of SIRIUS, Morgan Stanley reviewed the stock price performance and trading volumes of SIRIUS during various periods ending on February 16, 2007.

 

Morgan Stanley noted that the range of low and high closing prices of SIRIUS common stock during the 52-week period ending on February 16, 2007 was approximately $3.55 and $5.65, during the 90-day period ending on February 16, 2007 was approximately $3.55 to $4.30 and during the last 30 days ending on February 16, 2007 was approximately $3.55 to $4.15. Morgan Stanley noted that SIRIUS’ common stock price as of February 16, 2007 was $3.70 per share.

 

Historical Exchange Ratio Analysis

 

Morgan Stanley analyzed the historical trading price of XM relative to SIRIUS common stock based on closing prices between February 16, 2005 and February 16, 2007 and calculated the historical exchange ratios during certain periods implied by dividing the daily closing prices per share of XM common stock by those of SIRIUS common stock and the average of those historical trading ratios for various periods ended on February 16, 2007. Morgan Stanley also calculated the exchange ratio implied by the closing price per share of common stock of each of XM and SIRIUS on February 16, 2007 of $13.98 and $3.70 per share, respectively. This analysis implied the following exchange ratios and premiums:

 

 

 

 

Equity Research Analyst Price Targets

 

Morgan Stanley reviewed public market trading price targets for XM’s common stock prepared and published by equity research analysts. These targets reflect each analyst’s estimate of the future public market trading price of XM’s common stock. The range of equity analyst 12-month price targets for XM was from $14.00 to $25.00 per

share of XM common stock. Morgan Stanley noted that the merger consideration as of February 16, 2007 was $17.02 per share of XM common stock.

 

Morgan Stanley also reviewed public market trading price targets for SIRIUS’ common stock prepared and published by equity research analysts. These targets reflect each analyst’s estimate of the future public market trading price of SIRIUS’ common stock. The range of equity analyst 12-month price targets for SIRIUS was from $2.75 to $8.00 per share of SIRIUS common stock. Morgan Stanley noted that the price per share of SIRIUS as of February 16, 2007 was $3.70.

 

The public market trading price targets published by securities research analysts do not necessarily reflect current market trading prices for XM and shares of SIRIUS common stock and these estimates are subject to uncertainties, including the future financial performance of XM and SIRIUS and future financial market conditions.

 

XM Discounted Cash Flow Analysis

 

Morgan Stanley calculated a range of equity values per share for XM based on a 14-year discounted cash flow analysis. In preparing certain of its analyses, Morgan Stanley relied upon two specific scenarios with respect to the projected future financial performance of XM. The scenario referred to as “Wall Street research consensus estimates” refers to results of XM derived from a broad range of publicly available equity research analysts’ estimates. The scenario referred to as the “XM management plan” reflects certain projections prepared in connection with the proposed transaction based on discussions with XM’s management transaction group from 2007 through 2010 and extrapolations by Morgan Stanley of those projections for the period of 2011 through 2020. The XM management plan has not been formally approved by the board of directors of XM and has not been prepared with a view toward public disclosure. XM does not publicly disclose internal information of the type provided to Morgan Stanley in connection with Morgan Stanley’s analysis of the merger. The XM management plan was prepared in connection with the proposed transaction and is based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including, without limitation, factors related to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in the XM management plan. Morgan Stanley noted that each of the projections described in this paragraph were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including, without limitation, factors related to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in such projections. With respect to the Wall Street research consensus estimates, Morgan Stanley noted that the public market trading price targets published by securities research analysts do not necessarily reflect current market trading prices for share of XM and SIRIUS common stock and these estimates are subject to uncertainties, including the future financial performance of XM and SIRIUS and future financial market conditions.

 

Utilizing such projections, Morgan Stanley calculated XM’s annual after-tax unlevered free cash flows for fiscal years 2007 through 2020. Morgan Stanley estimated a range of terminal values calculated in 2020 utilizing perpetual growth rates. Morgan Stanley applied a range of perpetual growth rates of 1.0% to 4.0% to the unlevered free cash flows in the terminal year. Morgan Stanley then discounted the unlevered free cash flow streams and the estimated terminal value to a present value using a range of discount rates of 10.0% to 12.0%. Based on the aforementioned projections and assumptions, the discounted cash flow analysis of XM yielded an implied valuation range for XM common stock of $13.80 to $25.02 per share utilizing Wall Street research consensus estimates and $24.74 to $39.27 per share utilizing the XM management plan. Morgan Stanley noted that the per share merger consideration was $17.02 as of February 16, 2007.

 

SIRIUS Discounted Cash Flow Analysis

 

Morgan Stanley calculated a range of equity values per share for SIRIUS based on a 14-year discounted cash flow analysis.

 

Similar to the XM discounted cash flow analysis discussed above, in preparing certain of its analyses, Morgan Stanley incorporated two specific scenarios with respect to the projected future financial performance of SIRIUS. The scenario referred to as “Wall Street research consensus estimates” refers to results of SIRIUS derived from a

broad range of publicly available Wall Street equity research estimates. The scenario referred to as the “SIRIUS management plan” reflects certain projections prepared in connection with the proposed transaction based on discussions with SIRIUS’ management transaction group from 2007 through 2011 and extrapolations by Morgan Stanley of those projections for the period from 2012 through 2020. The SIRIUS management plan has not been formally approved by SIRIUS’ senior management or by the board of directors of SIRIUS and has not been prepared with a view toward public disclosure. SIRIUS does not publicly disclose internal information of the type provided to Morgan Stanley in connection with Morgan Stanley’s analysis of the merger. The SIRIUS management plan was prepared in connection with the proposed transaction and is based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including, without limitation, factors related to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in the SIRIUS management plan. In analyzing these extrapolated projections, Morgan Stanley relied upon observed trends as projected by Wall Street research consensus estimates with respect to the projected period beyond 2011. Morgan Stanley noted that each of the projections described in this paragraph are based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including, without limitation, factors related to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in such projections.

 

Utilizing such projections, Morgan Stanley calculated SIRIUS’ annual after-tax unlevered free cash flows for fiscal years 2007 through 2020. Morgan Stanley estimated a range of terminal values calculated in 2020 utilizing perpetual growth rates. Morgan Stanley applied a range of perpetual growth rates of 1.0% to 4.0% to the unlevered free cash flows in the terminal year. Morgan Stanley then discounted the unlevered free cash flow streams and the estimated terminal value to a present value using a range of discount rates of 10.0% to 12.0%. Based on the aforementioned projections and assumptions, the discounted cash flow analysis of SIRIUS yielded an implied valuation range for SIRIUS common stock of $3.47 to $5.58 per share utilizing Wall Street research consensus estimates and $5.67 to $8.77 per share utilizing the SIRIUS management plan. Morgan Stanley noted that the price per share of SIRIUS as of February 16, 2007 was $3.70.

 

Contribution Analysis

 

Morgan Stanley also performed a contribution analysis which reviewed the pro forma contribution of each of XM and SIRIUS to the combined entity and implied contributions based on certain operational, financial and valuation metrics based upon each of Wall Street research consensus estimates and management plans for both XM and SIRIUS whenever applicable. Morgan Stanley reviewed the pro forma effect of the merger and computed the implied equity contribution of XM and SIRIUS for selected years from 2005 to 2010, depending on the relevance of the analyzed operational and financial metric within that period. Such operational, financial and valuation metrics included subscribers, revenue, EBITDA pre-equity compensation expenses, discounted cash flow, Wall Street analyst price targets and market equity values as of February 16, 2007. Morgan Stanley also noted the implied exchange ratio derived from the implied equity contributions across the selected metrics.

 

The computations resulted in the following equity contributions and implied exchange ratios:

 

 

 

 

Morgan Stanley noted that the 4.60 exchange ratio of XM common stock to SIRIUS common stock would result in pro forma ownership of the combined company for holders of SIRIUS common stock equal to approximately 50%, consistent with a merger of equals.

 

Morgan Stanley also performed a quarterly historical contribution analysis which reviewed the pro forma contribution of each of XM and SIRIUS to the combined entity and implied contributions based on certain operational and financial metrics. Morgan Stanley reviewed the pro forma effect of the merger and computed the implied equity contribution of XM and SIRIUS on a quarterly basis for the period between the fourth quarter of 2004 and the fourth quarter of 2006. Such operational and financial results included subscribers, last twelve months revenue and run-rate revenue (run-rate revenue is calculated by annualizing the amount of revenue generated in each analyzed quarter). The computation showed, among other things, that SIRIUS implied equity contribution based on ending subscribers in each quarter increased from 26% in the fourth quarter of 2004 to 44% in the fourth quarter of 2006, increased from 21% in the fourth quarter of 2004 to 41% in the fourth quarter of 2006 based on last twelve months revenue, and increased from 23% in the fourth quarter of 2004 to 43% in the fourth quarter of 2006

based on run-rate revenue. The following table details the implied equity contributions for the selected metrics on a quarterly basis:

 

SIRIUS Implied Asset Value Contribution

 

 

Precedent Merger of Equals Analysis

 

Morgan Stanley reviewed the acquisition premium paid for a target’s common stock one day, 5 days, 10 days, 20 days, 30 days and 90 days prior to the announcement of the applicable transaction in precedent merger of equals of U.S.-based public companies, focusing on deals with a transaction value above $5.0 billion since 2004. Morgan Stanley reviewed transactions where the consideration paid consisted solely of stock. Morgan Stanley also reviewed the composition of the board of directors and senior management, and analyzed publicly available information, including the respective transaction values and pro-forma ownership, for the selected transactions reviewed.

 

The following transactions were reviewed in connection with this analysis:

 

 

Based on these analyses, Morgan Stanley noted a reference range of premiums paid of 0% – 30% and a strong correlation between the premium paid and an acquirer’s ability to nominate directors of the surviving company and appoint senior management.

 

No company or transaction utilized in the precedent transaction analyses is identical to XM, SIRIUS, or the merger. In evaluating the precedent transactions, Morgan Stanley made judgments and assumptions with regard to general business, market and financial conditions and other matters, which are beyond the control of XM and SIRIUS, such as the impact of competition on the business of XM, SIRIUS or the industry generally, industry growth and the absence of any adverse material change in the financial condition of XM, SIRIUS or the industry or in the financial markets in general, which could affect the public trading value of the companies and the aggregate value of the transactions to which they are being compared.

 

Pro-Forma Discounted Cash Flow Analysis

 

Morgan Stanley calculated a range of equity values per share for the combined company based on a 14-year discounted cash flow analysis of the pro-forma cash flow of the combined company, including estimated synergies, using two scenarios: (1) the pro-forma case based on Wall Street research consensus estimates for both SIRIUS and XM and (2) the pro-forma case based on management plans and extrapolations of management plans for both companies. In each of the Wall Street research consensus estimates and management plans, Morgan Stanley included cost synergies as projected by a broad range of Wall Street research analysts (revenue or capital expenditure synergies were not considered). Utilizing such projections, Morgan Stanley calculated the combined company’s annual after-tax unlevered free cash flows for fiscal years 2007 through 2020. Morgan Stanley estimated a range of terminal values calculated for 2020 utilizing perpetual growth rates. Morgan Stanley applied a range of perpetual growth rates of 1.0% to 4.0% to the unlevered free cash flows in the terminal year. Morgan Stanley then

discounted the unlevered free cash flow streams and the estimated terminal value to a present value using a range of discount rates of 10.0% to 12.0%.

 

Based on the aforementioned projections and assumptions, the discounted cash flow analysis of the combined company yielded an implied valuation range of common stock of $4.41 to $6.95 per share and an implied premium to the closing stock price of SIRIUS as of February 16, 2007 of 19.1% and 88.0% utilizing Wall Street research consensus estimates; and an implied valuation range of common stock of $6.60 to $10.06 per share and an implied premium to the closing stock price of SIRIUS as of February 16, 2007 of 78.5% and 172.0% utilizing the management plans.

 

Morgan Stanley also noted that based on the proposed transaction exchange ratio, the closing share prices of SIRIUS and XM as of February 16, 2007 and an illustrative value of synergies of approximately $6 billion, calculated by reference to the equity research consensus estimates, the estimated value creation for SIRIUS and XM from the proposed transaction would be $2.5 billion and $3.5 billion, respectively.

 

Morgan Stanley performed a variety of financial and comparable analyses for purposes of rendering its opinion. The preparation of a financial opinion is a complex process and is not susceptible to partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered. Furthermore, Morgan Stanley believes that the summary provided and the analyses described above must be considered as a whole and that selecting any portion of the analyses, without considering all of them as a whole, would create an incomplete view of the process underlying Morgan Stanley’s analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis or combination of analyses described above should not be taken to be the view of Morgan Stanley with respect to the actual value of SIRIUS or XM common stock or the value of the combined company.

 

In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business, regulatory, and economic conditions and other matters, many of which are beyond the control of Morgan Stanley, SIRIUS or XM. Any estimates contained in the analyses of Morgan Stanley are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.

 

Morgan Stanley conducted the analyses described above solely as part of its analysis of the fairness of the merger consideration pursuant to the merger agreement from a financial point of view to SIRIUS and in connection with the delivery of its opinion to SIRIUS’ board of directors. These analyses do not purport to be appraisals or to reflect the prices at which shares of common stock of XM or SIRIUS might actually trade.

 

The merger consideration was determined through arm’s-length negotiations between SIRIUS and XM and was approved by SIRIUS’ board of directors. Morgan Stanley provided advice to SIRIUS during these negotiations. Morgan Stanley did not, however, recommend any specific merger consideration to SIRIUS or that any specific merger consideration constituted the only appropriate consideration for the merger.

 

The opinion of Morgan Stanley was one of the many factors taken into consideration by SIRIUS’ board of directors in making its determination to approve the merger agreement. Consequently, the analyses as described above should not be viewed as determinative of the opinion of SIRIUS’ board of directors with respect to the merger consideration or of whether SIRIUS’ board of directors would have been willing to agree to a different merger consideration. The foregoing summary does not purport to be a complete description of all of the analyses performed by Morgan Stanley.

 

Morgan Stanley is an internationally recognized investment banking and advisory firm. Morgan Stanley, as part of its investment banking business, is continuously engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate, estate and other purposes. In the ordinary course of its trading, brokerage, investment management and financing activities, Morgan Stanley or its affiliates may actively trade the debt and equity securities of SIRIUS, XM and their affiliates for its own accounts or for the accounts of its customers and, accordingly, may at any time hold long or short positions in such securities.

 

Pursuant to an engagement letter, Morgan Stanley provided SIRIUS with financial advisory services and a financial opinion in connection with the merger. SIRIUS and Morgan Stanley entered into the engagement letter on the same day as Morgan Stanley issued its opinion. However, services performed prior to February 18, 2007 were subject to the same parameters as set forth in the engagement letter and no separate fee will be paid for any such services. The SIRIUS board of directors was not advised of the opinion that Morgan Stanley would deliver before execution of the engagement letter by SIRIUS. Pursuant to the terms of the engagement letter, SIRIUS has agreed to pay Morgan Stanley a transaction fee of $10 million for services rendered in connection with the merger, which will be paid only if the merger is successfully completed. Also, pursuant to the engagement letter, Morgan Stanley will be eligible to receive an additional fee of up to $7.5 million, payable at SIRIUS’ sole discretion. While this additional fee is being referred to as “incentive fee” in the engagement letter, it constitutes a discretionary fee. The SIRIUS board of directors has not yet determined whether to pay Morgan Stanley this discretionary fee, nor has it decided what factors it will consider in determining whether to pay this fee except that it may, among others, take into consideration the length and complexity of the engagement. In the event that the merger agreement is terminated, Morgan Stanley is entitled to receive 15% of any breakup fee paid to SIRIUS as a result of such termination, up to a maximum amount of $10 million. In addition, SIRIUS has agreed to indemnify Morgan Stanley and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses, including certain liabilities under the federal securities laws, related to or arising out of Morgan Stanley’s engagement and any related transactions. The SIRIUS board of directors reviewed the material terms of the Morgan Stanley engagement letter, including the contingent fee structure which was considered customary and appropriate for this type of transaction.

 

In the past, Morgan Stanley and its affiliates have provided financial advisory and financing services for SIRIUS and have received fees for the rendering of these services. In particular, an affiliate of Morgan Stanley acts as the administrative agent and collateral agent under SIRIUS’ $250 million term loan facility. Morgan Stanley may also seek to provide SIRIUS, XM or their affiliate’s services in the future and may receive fees in connection with such services.

 

Opinion of Financial Advisor to the XM Board of Directors

 

At the meeting of the board of directors of XM on February 18, 2007, JPMorgan rendered its oral opinion to the board of directors of XM that, as of such date and based upon and subject to the factors and assumptions set forth in its written opinion, the exchange ratio in the merger was fair from a financial point of view to the holders of common stock of XM. JPMorgan subsequently confirmed its oral opinion by delivering its written opinion, dated February 20, 2007, to the board of directors of XM. No limitations were imposed by XM’s board of directors upon JPMorgan with respect to the investigations made or procedures followed by it in rendering its opinions.

 

The full text of the written opinion of JPMorgan, dated February 20, 2007, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken in rendering its opinion, is attached as Annex C. The summary of JPMorgan’s opinion set forth in this Proxy Statement is qualified in its entirety by reference to the full text of the opinion. Stockholders should read this opinion carefully and in its entirety. JPMorgan’s opinion is directed to the board of directors of XM, addresses only the fairness from a financial point of view of the exchange ratio pursuant to the merger agreement to XM as of the date of the opinion, and does not address any other aspect of the merger. JPMorgan provided its advisory services and opinion for the information and assistance of the board of directors of XM in connection with its consideration of the proposed merger. The opinion of JPMorgan does not constitute a recommendation as to how any stockholder should vote with respect to the proposed merger. In addition, this opinion does not in any manner address the prices at which SIRIUS common stock will trade following the consummation of the merger.

 

In arriving at its opinion, JPMorgan, among other things:

 

 

 

JPMorgan also held discussions with certain members of the management of XM and SIRIUS with respect to certain aspects of the merger, and the past and current business operations of XM and SIRIUS, the financial condition and future prospects and operations of XM and SIRIUS, the effects of the merger on the financial condition and future prospects of XM and SIRIUS, and certain other matters JPMorgan believed necessary or appropriate to its inquiry.

 

In giving its opinion, JPMorgan relied upon and assumed, without assuming responsibility or liability for independent verification, the accuracy and completeness of all information that was publicly available or was furnished to or discussed with JPMorgan by XM and SIRIUS or otherwise reviewed by or for JPMorgan. JPMorgan did not conduct and was not provided with any valuation or appraisal of any assets or liabilities, nor did JPMorgan evaluate the solvency of XM or SIRIUS under any state or federal laws relating to bankruptcy, insolvency or similar matters. In relying on financial analyses and forecasts provided to JPMorgan by the managements of XM and SIRIUS, including the Synergies, JPMorgan assumed that they were reasonably prepared based on assumptions reflecting the best then available estimates and judgments by management of XM and SIRIUS as to the expected future results of operations and financial condition of XM and SIRIUS to which such analyses or forecasts relate. JPMorgan expressed no view as to such analyses or forecasts (including the Synergies) or the assumptions on which they were based. JPMorgan also assumed that the merger will qualify as a tax-free reorganization for U.S. federal income tax purposes, have the tax consequences described in discussions with representatives of XM, that the other transactions contemplated by the merger agreement will be consummated as described in the merger agreement, and that the definitive merger agreement would not differ in any material respect from the draft thereof provided to JPMorgan. JPMorgan relied as to all legal, regulatory or tax matters relevant to the rendering of its opinion upon the assessments made by advisors to XM with respect to such issues. JPMorgan further assumed that all material governmental, regulatory or other consents, authorizations and approvals necessary for the consummation of the merger will be obtained without any adverse effect on XM and SIRIUS or on the contemplated benefits of the merger.

 

The JPMorgan opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to JPMorgan as of, the date of the JPMorgan opinion. Subsequent developments may affect the JPMorgan opinion, and JPMorgan does not have any obligation to update, revise or reaffirm the JPMorgan opinion. The JPMorgan opinion is limited to the fairness, from a financial point of view, to the holders of common stock of XM of the exchange ratio by which each share of XM common stock will be converted into shares of SIRIUS common stock should the merger be completed and JPMorgan has expressed no opinion as to the fairness of the merger to, or any consideration to be received by, the holders of any other class of securities, creditors or other constituencies of XM or as to the underlying decision by XM to engage in the merger. JPMorgan has also expressed no opinion as to the price at which the shares of XM or SIRIUS common stock will trade at any future time.

 

In accordance with customary investment banking practice, JPMorgan employed generally accepted valuation methods in reaching its opinion. The following is a summary of certain of the financial analyses undertaken by JPMorgan and delivered to the board of directors of XM on February 18, 2007, which analyses were among those considered by JPMorgan in connection with delivering the JPMorgan opinion.

Projections

 

In performing its analysis of XM, JPMorgan relied upon (1) estimates provided by the management of XM prepared in connection with the proposed transaction for the period 2006 to 2010, plus an extension of such estimates through the period ending 2016 prepared by JPMorgan and reviewed and approved by the management of XM, which are referred to in this Proxy Statement as the XM Management Case and (2) Wall Street analyst projections, which are referred to in this Proxy Statement as the XM Street Case. In performing its analysis of SIRIUS, JPMorgan relied on (1) a base case prepared in connection with the proposed transaction by the management of XM with the assistance of an independent consultant based on estimates provided by the management of SIRIUS for the period 2006 to 2010, plus an extension of such estimates through the period ending 2016 prepared by JPMorgan and reviewed and approved by the management of XM, which is referred to in this Proxy Statement as the SIRIUS Management Case (2) a sensitivity case prepared in connection with the proposed transaction by the management of XM with the assistance of an independent consultant for the period 2006 to 2010, plus an extension of such estimates through the period ending 2016 prepared by JPMorgan and reviewed and approved by the management of XM, which is referred to in this Proxy Statement as the SIRIUS Adjusted Management Case, and (3) Wall Street analyst projections, which are referred to in this Proxy Statement as the SIRIUS Street Case. These estimates were based on assumptions regarding the financial performance of XM and SIRIUS.

 

The projections furnished to JPMorgan for XM and SIRIUS were prepared by the managements of XM (with the assistance of an independent consultant) and SIRIUS in connection with the proposed transaction. Neither XM nor SIRIUS publicly discloses internal management projections of the type provided to JPMorgan in connection with JPMorgan’s analysis of the merger, and such projections were prepared in connection with the proposed transaction and were not prepared with a view toward public disclosure. These projections were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including, without limitation, factors related to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in such projections.

 

Historical exchange ratio analysis

 

JPMorgan reviewed the per share daily closing market price of SIRIUS common stock and XM common stock over the previous year, and calculated the implied historical exchange ratios during this period by dividing the daily closing prices per share of XM common stock by those of SIRIUS common stock and the average of those implied historical exchange ratios for the one-day, five-day, ten-day, one-month, three-month, six-month, one-year and two-year periods ending February 16, 2007. The analysis resulted in the following average implied exchange ratios for the periods indicated (rounded to the nearest hundredth):

 

 

JPMorgan noted that an historical stock trading analysis is not a valuation methodology and that such analysis was presented merely for informational purposes.

Relative Discounted Cash Flow Analysis

 

JPMorgan conducted a discounted cash flow analysis for each of XM and SIRIUS for the purpose of determining their respective fully diluted equity value per share on a stand-alone basis (i.e., without Synergies).

 

JPMorgan calculated the unlevered free cash flows that XM and SIRIUS are expected to generate during fiscal years 2007 through 2016 based upon financial projections prepared by the management of XM in connection with the proposed transaction. JPMorgan also calculated a range of terminal values of both XM and SIRIUS at the end of the 10-year period ending 2016 by applying a perpetual revenue growth rate ranging from 2.5% to 4.5%. The unlevered free cash flows and the range of terminal values were then discounted to present values using a range of discount rates from 10.0% to 14.0%, which were chosen by JPMorgan based upon an analysis of the weighted average cost of capital of XM and SIRIUS. The present value of the unlevered free cash flows and the range of terminal asset values were then adjusted for XM and SIRIUS’ estimated 2006 fiscal year-end net debt to obtain fully diluted equity value.

 

As part of the total equity value calculated for XM, JPMorgan calculated the present value of the tax benefit from XM’s estimated net operating loss carry-forwards (referred to as NOLs) balance as of December 31, 2006. As part of the total equity value calculated for SIRIUS, JPMorgan calculated the present value of SIRIUS’ estimated NOLs balance as of December 31, 2006.

 

The analysis yielded the following implied equity value per share:

 

 

JPMorgan compared the results for the XM Management Case to the SIRIUS Management Case and to the SIRIUS Adjusted Management Case. JPMorgan also compared the results for the XM Street Case to the SIRIUS Street Case. For each comparison, JPMorgan compared the highest equity value per share for XM to the lowest equity value per share for SIRIUS to derive the highest relative ownership implied by each pair of estimates. JPMorgan also compared the lowest equity value per share for XM to the highest equity value per share for SIRIUS to derive the lowest relative ownership implied by each pair of estimates. These relative equity ownerships yielded the following implied exchange ratios:

 

 

Contribution Analysis

 

JPMorgan analyzed the contribution of each of XM and SIRIUS to the pro forma combined company with respect to subscribers, EBITDA (pre-stock based compensation), operating cash flow, or OCF, and levered free cash flow, or LFCF (defined as OCF minus capital expenditures), for fiscal years 2006 through 2010 and, except for subscribers, 2007-2010 cumulative. Out of the four metrics, JPMorgan focused on subscriber projections and LFCF. A focus on subscriber contributions assumes that per subscriber profitability of XM and SIRIUS will converge over time. LFCF is more relevant than EBITDA and OCF because EBITDA and OCF do not take into account the impact