quote.bloomberg.com
Analyst Conflicts Taint Digital Radio Research: Call of the Day
By Robert Dieterich
New York, June 8 (Bloomberg) -- Lehman Brothers Inc. says the idea drivers will pay $10 a month for satellite radio in their cars is so compelling that it's okay to ignore the lack of profit, revenue or even customers for providers of the service.
Investors aren't convinced. They see a possible conflict of interest in Lehman's ``strong buy'' rating on Sirius Satellite Radio Inc. because the firm underwrote a $210 million stock sale in February and is a big holder of the company's shares.
The conflict between investment banking relationships and stock research -- at Lehman and elsewhere -- leaves investors skeptical of Sirius and its main rival, XM Satellite Radio Holdings Inc., even though analyst ``buy'' recommendations outnumber neutral ratings more than two to one.
``They have an agenda, don't they,'' said James Grefenstette, manager of the $1.3 billion Federated Growth Opportunities Fund. A firm's fee from investment banking ``doesn't mean what they say isn't true,'' he said, though ``you have to take what they say with a grain of salt.''
Sirius shares have fallen 80 percent from their high in February 2000; XM Satellite has dropped 65 percent. Investor confidence in companies with untested business plans and a need for funding has been shaken by bankruptcies and defaults -- witness Iridium LLC and Globalstar Telecommunications Ltd, which promised global satellite phone service, and Winstar Communications Inc., which planned a fixed-wireless communications network.
Grefenstette said he sold his shares of XM Satellite last year because of ``the collapse in any stock that needed (additional) funding'' to reach profitability.
Underwriters
Some firms other than Lehman with a favorable view of satellite radio's potential also have underwritten stock and bond offerings for Sirius and XM Satellite Radio.
Marc Nabi at Merrill Lynch & Co. has Sirius at ``near term accumulate,'' a rating that's between the firm's highest and its neutral view. Merrill was manager for two earlier Sirius stock sales and for three of its bond issues.
Robert Peck gives XM Satellite his highest rating at Bear, Stearns & Co., which was manager for a $125 million debt offering this year.
Lehman's Kidd said his view on these stocks wasn't linked to his firm's underwriting relationship with Sirius. ``I've always been a big believer'' in satellite radio, he said.
Kidd said he only joined Lehman last month and had rated the stocks ``strong buy'' at his previous employer, CE Unterberg Towbin. Lehman hadn't covered the satellite-broadcasting industry after Peck left the firm last summer for Bear, Stearns.
The stock offering Lehman arranged for Sirius in February came as the company's cash fell to less than $75 million. In addition to fees earned for underwriting, Lehman has been granted Sirius stock options as an incentive to lend the company $150 million.
`Obvious Conflict'
That loan was contingent on Sirius demonstrating the viability of its broadcasting software. The options were part of an agreement by Lehman to extend the deadline for that demonstration.
As of March 31, Lehman owned 897,800 Sirius shares.
``There's obvious conflict there,'' said Grange Johnson, manager of LaGrange Capital Management, a hedge fund firm with $20 million in assets that owns both Sirius and XM Satellite. ``You always have to look with a skeptical eye.''
Still, Johnson takes Lehman's ownership of Sirius shares as a sign the firm likes the company's prospects.
``I know they believe in the stock big time,'' he said. He said that Lehman has paid $20 a share or more for Sirius stock. Sirius rose $1.19 to $15.04 today. XM Satellite shares rose 95 cents to $16.85.
Johnson also said that the declines by Sirius and XM Satellite over the last year make the potential gains more attractive than the potential losses. |
