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A Sirius Bid for Mickey? Nah

By Stacy Trombino Will the Mouse House sell its radio empire to the future home of Howard Stern? According to a recent news report, Mel Karmazin, CEO of Sirius Satellite Radio (SIRI), is mulling a bid for Disney's (DIS) radio assets. But Standard & Poor's doesn't think investors will be hearing wedding bells for the two companies anytime soon.

The New York Post report, which has not been confirmed by either company, triggered market speculation about a bid by Sirius following a recent and unconfirmed Wall Street Journal report that Disney is exploring the fate of its $3 billion radio station and network group. The latter report, citing unidentified people who claimed to be familiar with the matter, said the company might try to structure a tax-free spin-off of the radio assets to Disney's shareholders. Another alternative, according to the media reports, would be selling and combining the Disney radio assets with another radio company.

DIFFERENT ANIMALS. S&P media and entertainment equity analyst Tuna Amobi says the spinoff seems a more likely scenario than a sale to Sirius, which along with rival XM Satellite Radio (XMSR), is one of only two satellite-radio providers that have been awarded government licensing deals to provide digital-audio radio services. Amobi has reiterated his buy opinion on the shares of Disney and his hold opinion on the shares of Sirius.

While Disney's radio assets are outperforming those of its peers, Amobi sees a greater possibility of a spin-off under CEO-elect Robert Iger, who will formally succeed Michael Eisner as Disney CEO Oct. 1. Amobi believes Iger will continue to focus on Disney's key strategic goals of content creation, digital distribution, and international expansion. He adds that no other major assets have been suggested as likely spinoff candidates by Disney.

While Amobi views Disney's radio assets as among the best, he deems a purchase by Sirius unlikely. "The deal would significantly dilute Sirius' long-term profile," he says. "It's not clear to us that there would be compelling synergies that would arise from the relatively incompatible business models for satellite and terrestrial radio."

TOO MUCH DRAG? Although Disney doesn't break out the financials for its radio group, Amobi estimates that its network and 71 owned and operated stations are currently worth about $2.5 billion to $3.5 billion. He's skeptical that Disney can optimally reinvest the potential proceeds from a sale of the ABC radio network and the 71 radio stations. "For this reason, a proposed spin-off seems more plausible to us than an outright sale," he says.

Furthermore, Amobi says that while Sirius' cash reserves are growing -- more than $600 million at the end of its most recent fiscal quarter -- a deal of this magnitude would likely put undue strain on its balance sheet. It could also potentially delay Sirius' anticipated attainment of positive free cash flow. Its current strategy, Amobi believes, is to drive subscriber growth by providing compelling programming, leveraging its current relationships, and expanding retail distribution with the introduction of newer products.

For 2005, Amobi estimates negative cash flow of about $410 million for Sirius, widening to $520 million in 2006. Using

discounted cash-flow analysis, he has set a 12-month target share price of $6.50 for Sirius. He notes that risks to S&P's recommendation and target price include Sirius' lack of free cash flow; competition for customers, talent, and programming; and regulatory factors. Trombino is a reporter for Standard & Poor's Global Editorial Operations

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