Sirius-XM Merger: Costly Static
Mel Karmazin has stopped by BusinessWeek's offices for lunch, but he's not eating much. He ignores the salad and picks at the chicken. He's too busy explaining why the proposed combination of Sirius Satellite Radio (SIRI), where he is chief executive, and XM Satellite Radio (XMSR) isn't your typical merger. In most deals, he says, it's the investment bankers who make the most in fees, then the accountants, and finally the lawyers. "In this merger, lawyers will make more money than the bankers," he says, prompting a round of chuckles. "It's easy for you to laugh. You don't see me laughing."
Karmazin and Gary Parsons, the chairman of XM, are trying to push through the merger they announced in February (BusinessWeek, 2/21/07) in a bid to unify the two satellite radio companies with a combined total of 15 million subscribers.
But they've encountered fierce opposition, especially from the National Assn. of Broadcasters, the group that represents traditional radio and television stations across the country. The NAB has fought to block the merger by arguing that a "state-sanctioned" monopoly would be bad for consumers and would harm local radio stations nationwide. "The downsides of a government-sanctioned monopoly are clear," said David Rehr, president and chief executive of the NAB in testimony before Congress earlier this year. "Monopolists have the ability to raise prices and discriminate."
Karmazin and Parsons say they still expect their deal to go through. But they've been a bit surprised by the ferocity of the opposition, leading to high-profile coverage in The New York Times (NYT) and other newspapers as well as congressional inquiries. Karmazin points out that when AT&T (T) acquired BellSouth for more than $80 billion, there were no congressional hearings. "We've done four congressional hearings," he says, "on two companies that have never made a dime." Says Parsons: "I was a little bit surprised at how many dollars they were throwing at it—and how many studies and how many politicians and lobbyists and things."
XM and Sirius are spending plenty to make sure the deal is completed. In disclosures filed recently, Sirius said it had spent $650,000 on lobbyists in the first half of the year, while XM said it had spent $580,000. The two have lined up a who's who of Washington insiders. They've hired a total of 13 lobbying firms this year, with Palmetto Group pulling in the most money from XM, at $70,000, and Wiley Rein taking in the most from Sirius, at $420,000. The other moneymakers range from Mehlman Capitol Strategies, run by former Republican National Committee Chairman Ken Mehlman, to Quinn Gillespie & Associates, led by Jack Quinn, onetime chief of staff to former Vice-President Al Gore.
The two companies still haven't come close to keeping pace with the NAB. The association spent $4.3 million in the first half of the year. It used 10 firms itself, led by the Ashcroft Group, headed by former Attorney General John Ashcroft. The opposition has generated letters from people like Senator Sam Brownback (RKan.), who said the deal would "not serve the public interest." And the NAB has posted a banner on its headquarters that reads "XM + Sirius = Monopoly."
Lobbying fees are only part of the expense for the satellite companies. In a recent filing with the Securities & Exchange Commission, XM made it clear that the company is spending millions to get the merger through Washington's regulators. For the first six months of the year, XM's general and administrative costs rose 93%, to $70 million, and the company said the surge was driven "primarily by an increase in consulting fees and legal fees associated with various legal proceedings, regulatory inquiries, and transactions, such as the pending merger with Sirius."
Sirius offers less detail on its incremental expenses. But XM's increase over the first six months of the year works out to a total of $33.8 million, or $186,000 a day. That's roughly equivalent to a team of 47 lawyers and lobbyists working full-time at $500 an hour. If XM keeps up the same pace of expenditures, it may boost its spending by nearly $70 million as it tries to close its deal with Sirius, in addition to Sirius' own expenses. No wonder Karmazin isn't laughing about his legal bills.
The reason the two companies are pushing so hard for their deal to be approved is the potential benefits of a combination. While each company can save a few million bucks individually by cutting back on advertising or the like, together the savings would be of a completely different magnitude. "If you combine the two companies, there are billions of dollars—billions with a b—that could be saved," says Karmazin over lunch. "It's speculated that it could be as much as 50% of the market cap of the combined companies is potentially available in synergies." Parsons adds, "You don't find that very often."
The costs of failure could be high, too. The two companies would certainly take longer to become profitable, if they were able to make it at all. Moreover, they may not be able to stand on their own, and could face an outright acquisition by a satellite television company such as DirecTV (DTV) or a cable provider such as Comcast (CMCSA). There's also been speculation that shock-jock Howard Stern could bolt Sirius if the merger doesn't go through, since he would be stuck with a relatively small audience. But Karmazin bats away such questions. "Howard will never go back," he says, citing the freedom Stern enjoys without regulations from the Federal Communications Commission.
In the wide-ranging discussion, the two executives discussed many issues in the media industry. Karmazin, the former chief of CBS (CBS), was asked for his thoughts on how to fix the once legendary but now flagging CBS Evening News. "What would I do with the CBS Evening News? I challenged everybody when I was there. I said, 'Let's eliminate it.' You know, I mean who cares?" he says. "The issue was that that became impractical because if you're a network, you've got to have a news organization."
His real answer is no less provocative. "What I would have done, I tried to do, and that was buy CNN," he says. "Time Warner (TWX) should own Cablevision (CVC). And if, in fact, they were to buy Cablevision, they would have needed some money. And I don't think CNN is a core asset for Time Warner. CNN could have been a cheap way of doing the evening news. I would say certainly one of my biggest disappointments was not being able to buy CNN."
For now, Karmazin and Parsons have more immediate challenges. The NAB is making the argument that satellite radio is a distinct market from traditional radio so that merging the only two satellite companies would create an unjustifiable monopoly. XM and Sirius say government regulators should view traditional and satellite radio as competitors to each other, so by their calculation the two companies have a mere 3% to 4% of the whole market. Dennis Wharton, executive vice-president of media relations at the NAB, scoffs at that notion. "In Mel Karmazin's world, elevator music is competition to satellite radio," he says. "Get real. It doesn't pass the laugh test."
Karmazin has plenty of sharp words himself, though they tend to be delivered with as much humor as vitriol. "The NAB has made an argument that is sort of unique," he says. "They have said that we compete with them, but [that] they don't compete with us."
See BusinessWeek's slide show for a look at the star-laden lineups of Sirius and XM.