Sirius/XM Merger: FCC Roadblock Ahead?

WASHINGTON D.C., Feb. 20, 2007/Satnews Daily/ ― For Sirius Satellite Radio (SIRI) and XM Satellite Radio (XMSR), which announced a $13 billion merger amid investor concern and analyst's skepticism, job number one is convincing the Federal Communications Commission (FCC) the deal isn't the "M" word in disguise.

The merger of the only two players in the decades old subscription satellite music industry has given rise to an entity--as yet without a company name--with a combined market capitalization of over $6 billion and 14 million subscribers between them. The deal will create a nationwide audio entertainment provider with combined 2006 revenues of $1.5 billion. Neither company has returned a profit from its operations, however.

The companies said they had entered into a definitive agreement to combine their radio operations in a tax-free, all-stock merger of equals with a combined enterprise value of $13 billion. Under the deal's terms, XM shareholders will receive a fixed exchange ratio of 4.6 shares of Sirius common stock for each share of XM they own. Sirius and XM shareholders will each own 50 percent of the new company.

The new entity, which will be headed by Sirius chief executive officer Mel Karmazin and XM chairman Gary Parsons in their old positions, will command seven in-orbit satellites, of which five remain active. The newest in this combined fleet, XM-4, was last week sold to a trust by XM for $289 million to pay off mortgages and restore liquidity.

The partners will have a tough time convincing the FCC they haven't created a monopoly, according to some analysts. The FCC must first approve the merger and that's a big if since both XM and Sirius are the entire satellite radio market.

FCC rules clearly state that one satellite radio provider cannot buy the other one. That rule could be waived, however. A merger would also have to win antitrust approval from the Department of Justice.

"Obviously the Commission will evaluate any transaction filed to make a determination whether or not approval would be in the public interest," said FCC chairman Kevin Martin in a statement. "The hurdle here, however, would be high as the Commission originally prohibited one company from holding the only two satellite radio licenses."

"The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices, " Martin said.

"The hurdle here, however, would be high as the Commission originally prohibited one company from holding the only two satellite radio licenses. The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices. "

Last January in Washington, Martin said the two satellite radio companies would not be allowed to merge under current regulatory rules. 

The National Association of Broadcasters (NAB), a trade association representing free, local radio and TV stations and broadcast networks, is against the deal.

In a statement, NAB said that given the government's history of opposing monopolies in all forms, NAB would be shocked if federal regulators permitted a merger of XM and Sirius. NAB Executive Vice President Dennis Wharton said that when the FCC authorized satellite radio, it specifically found that the public would be served best by two competitive nationwide systems.

Sirius and XM are expected to argue that market conditions have changed significantly since 1997, and that satellite radio now competes against more competitors such as iPods, HD radio and music phones, among others. Both companies have dozens of channels of talk and commercial-free music available for monthly fees of some $13.

Parsons argued there was a much larger marketplace of competition today. Karmazin claims the public will win out with a greater overall array of programming content.

"The standard is if the deal is in the public interest," Karmazin said. "We believe that the benefits are that that consumer will be the big winner. We would not be announcing this if we did not think that we'd have approval."

Both men, who described the deal as a "merger of equals," said the combined company would be better positioned to compete effectively with the continually expanding array of entertainment alternatives that consumers have embraced since the FCC first granted satellite radio licenses a decade ago.

Another hurdle facing the merger are Sirius' investors who might not react positively to their company issuing more than a billion shares to acquire a struggling competitor. Then, there's the uncertainty of what investors can expect out of the merged XM-Sirius entity.

Stocks of both companies dropped more than 40 percent in 2006 on concerns about their continued growth in subscribers and weakness in the retail market. Investors, however, hope that a merger could cut costs significantly.

XM operates four in-orbit geostationary satellites (XM-1 to XM-4), of which two remain active. Sirius has three satellites (Radiosat-1 to -3) in highly elliptical orbits with a fourth as a ground spare.

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