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New Conditions May Ease XM-Sirius Merger

As the satellite-radio providers seek Congress' approval to wed, competition from iPods—and a few concessions—might boost their case

The proposed $13.6 billion merger between satellite radio players XM Radio (XMSR) and Sirius Satellite Radio (SIRI) would seem to violate conditions that government regulators placed on the companies years ago (see, 2/21/07, "Satellite Static: The XM-Sirius Merger"). When the Federal Communications Commission granted the radio licenses to the companies in 1997, the commission's decision specified that they couldn't be owned by the same entity.

The companies claim that their merger agreement will nonetheless win approval of the FCC, a view that's supported by many analysts who follow the industry. George Reed-Dellinger of researcher Washington Analysis says the odds of approval are "60% plus."

The companies argue that the market has changed over the last 10 years. The companies now face competition from MP3 players and Apple's (AAPL) ubiquitous iPod, a product that didn't exist in 1997 (see, 2/21/07, "Satellite Radio Falls on Deaf Ears"). Now carmakers are starting to put jacks for such devices into cars, which is where most satellite radios are used. High-definition terrestrial radio, multimedia wireless phones, and new technologies such as WiMAX wireless Internet access networks compete as well. "We strongly believe that this deal can and will meet the requirements of an antitrust review, and that it will be in consumers' interest, leading to a stronger company providing more choices at attractive prices," XM Chairman Gary Parsons said in an interview.

Times Have Changed. So What?

Regardless of whether the argument is correct, it might not be enough to push the deal through the regulatory process. Lawmakers and regulators are sensitive to how the deal is viewed by the public. Congress is holding hearings on the deal. The House judiciary committee is scheduled to hold a hearing on Feb. 28, where Sirius Chief Executive Mel Karmazin is scheduled to testify. The House telecommunications subcommittee is scheduled to hold a hearing on Mar. 7. The deal doesn't actually need House approval, although it must win approval from the FCC and the Justice Dept.

Given the high level of government scrutiny, analysts such as Reed-Dellinger believe that the companies may have to do more than simply argue that times have changed if they want the deal to survive. He believes that several conditions and other "not so obvious" steps can enhance the odds of approval.

The Justice Dept. tends to approve deals or oppose them outright. Most analysts believe the Justice Dept. is likely to let this deal go through because new players in the audio entertainment market will placate antitrust concerns. The bigger issue is the FCC, which tends to negotiate a settlement to resolve qualms over mergers. In this case, the companies might need to agree to conditions to win approval from the FCC.

Placating Options

For starters, the companies could agree not to carry local radio content such as news, traffic, and weather. That could go a long way toward placating broadcasters, who oppose the deal, according to Reed-Dellinger. The satellite companies could agree to price caps, to ease fears that the deal will lead to monopolistic price gouging. They also could agree to establish a wholesale business, allowing rivals to purchase their service and resell it to consumers under a competing brand. Another option would be to return some of their radio spectrum to the government, which could then sell it to another wireless company or give it to public safety agencies, according to Reed-Dellinger.

Karmazin is believed to be open to cooperating with regulators and doing what needs to be done to get the merger through.

The FCC has great latitude to approve the deal, regardless of what restrictions were imposed in 1997. The ownership restrictions don't stem from an FCC rule, which could take several years to change. They were simply part of the decision that the FCC issued when it approved the sale of the licenses. Such decisions have less force than rules. But even FCC rules can be waived if the commission finds that doing so would be in the public interest.

The merger also could be facilitated by several facts that are unique to the satellite radio industry. The FCC has all but ruled out a merger of satellite TV operators DirecTV (DTV) and Echostar (DISH). That's because the satellite TV companies are the only source of paid TV for the significant part of the U.S. that still isn't wired for cable TV, mostly in rural areas. "But music is readily available across the U.S., with the exception of a few places like remote mountain valleys. And even there, you can bring your iPod or MP3 player," says antitrust lawyer Joe Sims of Jones Day, an adviser to XM.

Otherwise, the Long-Shot Strategy

Should worse come to worse, the companies always could appeal to the "failing companies doctrine," an argument that regulators should approve a deal if a company's survival depends on it. But the companies don't believe that's necessary. While neither XM nor Sirius has ever shown a quarterly profit (see, 3/5/07, "XM & Sirius: What a Merger Won't Fix"), they both reported narrowing losses and solid subscriber growth this week. Sirius said on Feb. 27 that revenue for the fourth quarter of 2006 more than doubled to $193 million, from $80 million in the final quarter of 2005. Meanwhile, its losses declined to $246 million for the quarter, compared with a year-ago loss of $311 million. It expects subscriber growth of 33% this year.

The day before, XM said that fourth-quarter revenues rose 45% to $257 million, while losses decreased to $264 million from $270 million. "The failing companies' doctrine is not part of our filing. We don't have to do this merger, although it would be good for both companies and consumers," Parsons said.

Ten years ago, the FCC very clearly said that a merger of XM and Sirius was out of bounds. But in a hotly competitive market, getting a deal done may be among the least of the companies' worries. Even if they win approval, they still need to fight their way to profitability.

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