Sirius-XM Deal: The Pace Quickens

FCC Chairman Martin's nod, with conditions both companies have O.K.'d, means a decision could be reached within a month

The static over a planned merger between XM Satellite Radio and Sirius Satellite Radio may finally be clearing. U.S. regulators are likely to give their blessing to the transaction, imposing conditions that both sides have said they're willing to accept and analysts say neither side will find too onerous.

Federal Communications Commission Chairman Kevin Martin on June 16 said he would give a green light to the deal, assuming XM (XMSR) and Sirius (SIRI) make some concessions aimed at ensuring the combination doesn't hurt consumers or thwart competition. "The conditions the FCC is considering applying are not nearly encumbering enough to dissuade the companies from going ahead," says Frederick Moran, an analyst at Stanford Group. "[The conditions] are a small price to pay."

Investors, who in recent weeks had grown concerned (, 5/8/08) about how long it was taking the FCC to sign off, breathed a sigh of relief. Sirius shares rose 3.15%, to 2.62, on the news, while XM's stock rallied 3.96%, to 11.30.

Martin is likely to circulate a proposal to the four other commissioners later this week, and analysts expect a decision within a month. "I am recommending that, with the voluntary commitments they've offered, on balance, this transaction would be in the public interest," Martin said in a statement. He's asking for a total of eight concessions, including lifting restrictions on the hardware that is able to transmit the enlarged company's broadcasts, and opening some channels to noncommercial and minority-owned broadcasters.

Billions in Cost Savings

Analysts say those hurdles won't hinder the new company's bid to wring billions of dollars in cost savings by combining. "I don't think that these conditions will" keep them from meeting those targets, says Blair Levin, an analyst at Stifel Nicolaus and a former FCC staffer. Tom Watts, an analyst at Cowen, says he is not revising his estimates of $5 billion in cost savings. The synergies will, instead, depend largely on other variables, such as Sirius-XM's ability to reenergize growth. The new company would also need to renegotiate contracts, due for renewal in 2012 and beyond, that set terms for satellite radios in new car models.

Some merger conditions may even help the combined company achieve its goal of reviving growth, which has slowed in recent months. Take the seemingly major requirement that the companies allow any hardware manufacturer to make and sell satellite radio receivers. This would appear to make it easier for consumers to choose between satellite radio, HD radio, music players, and other rival formats. Yet looked at another way, with satellite radio no longer limited to stand-alone devices, it might find its way into more gadgets, such as phones and music players. That, in turn, could widen satellite radio's distribution. What's more, Sirius and XM may be able to save money by no longer having to subsidize satellite radio players, as they do now.

Consider the requirement that Sirius-XM make 24 channels available for noncommercial and minority programming. "That can create demand for these users to sign up for the service," says James Goss, an analyst at Barrington Research. Yes, the condition means the two companies must get rid of about 8% of their current programming—but analysts estimate there's as much as a 50% overlap between the XM and Sirius program lineups anyway. What's more, by giving away 24 channels, Sirius-XM also may save on programming fees. "If anything, it should save Sirius-XM money," says April Horace, an analyst at Janco Partners.

Headed That Way Anyway

Other conditions are in keeping with Sirius-XM's self-chartered course. The FCC would require the company to make its service available in Puerto Rico, and Sirius and XM have already been working to expand coverage. Then there's the requirement that the combined company not raise its rates for 36 months after the merger. "It may be a moot issue," says Tom Taulli, a mergers-and-acquisitions expert. "With the economy slowing, consumers may not be willing to pay more anyway." Chances are the company would have started selling smaller, cheaper packages and offering à la carte channels in order to grow faster, with or without FCC directives.

To be sure, at least one thing has some analysts concerned: the requirement that the company sell programming à la carte. After all, when industries such as cable begun offering channels that way, many consumers ended up paying less each month. But perhaps Sirius-XM could make up this lower per-subscriber revenue by drastically increasing its subscriber base. Consultant Parks Associates estimates that the combined company could grow its user total from 20.5 million this year to 26 million in 2009. Without a merger, XM and Sirius will only have 19 million customers by the end of 2008 and 23 million in 2009.

There's still a need to win support elsewhere within the FCC. Martin needs at least two other commissioners to vote for the deal, and FCC sources tell he hasn't yet been assured he'll get those votes. By releasing his statement, Martin may simply be putting pressure on the other commissioners to come to a decision after allowing the deal to percolate for an unprecedented 16 months. In any case, many experts expect Martin's fellow Republicans, Deborah Taylor Tate and Robert McDowell, to vote yes. The other two commissioners are Democrats.

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