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Regulatory Hurdles Loom Large in XM/Sirius Merger TMCnet Contributing Editor Talk of mergers and acquisitions and you cannot segregate the problems that come with them. Each party associated with a merger hopes for a smooth transition, so that the vested interests of all are dealt with.
Recently, Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. signed an agreement to merge, but even before their merger could take place, they received warning from federal regulators that this merger will be tough - especially considering there is already a provision in place that would prevent either company from holding the two satellite radio licenses. The Federal Communications Commission (FCC (News - Alert)) will evaluate the proposed transaction to ascertain if it lies in the public interest or not. FCC Chairman Kevin Martin said in a press release, “The hurdle here, however, would be high as the commission originally prohibited one company from holding the only two satellite radio licenses.” He further added, “The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices.” Both XM and Sirius suffered significant financial losses in order to subsidize new subscribers. Their stocks declined more than 40 percent last year and there were concerns about the growth in subscribers - yet investors continued to hope of a merger. They stepped up an arms race to close long-term programming deals. Sirius signed a whopping $500 million deal for five years in 2004 with Howard Stern. On the other hand, XM paid Major League Baseball a sum of $650 million for a deal that spans for 11 years. In addition, XM signed a $55 million deal for three years with Oprah Winfrey, the talk show host. One of the major reasons for the merger is to save costs. CEO of Sirius Mel Karmazin will take over as the CEO of the new company. He refused to comment about how much the companies hoped to gain through this merger. Although he sounded optimistic about achieving regulatory approval, he said, “We understand that there’s a lot of work to be done.” Investors and analysts hope that the cost savings would help the companies amid softening retail demand. The two services currently offer many channels of talk and commercial-free music for a meagerly monthly fee of about $13. XM radio receivers do not receive signals from Sirius, and vice versa. However, Karmazin told during an interview that the companies are trying to develop a receiver to receive both signals. He also said that the companies would bring programming, exclusive to one provider, to listeners of the other. This would mean getting Major League Baseball games, currently available on XM, to Sirius listeners. This deal is billed as a merger of equals, implying that shareholders from both the sides shall own approximately half of the combined company. Although Karmazin will be the new CEO, XM’s CEO, Hugh Panero, will stay on until the deal is finalized For every share they own, XM shareholders are going to receive 4.6 shares of Sirius stock. This information is based on Friday’s closing price for Sirius shares, valuing the company at $4.57 billion or $17.02 per share. In other words, XM shareholders received a premium of 22 percent to $13.98 closing value of their stock on Friday. The merger would mean that the two companies would have to get an antitrust approval from the Department of Justice (DoJ). The companies can argue that they compete not only with each other, but also with traditional radio and digital audio sources such as iPod, mobile phones, and non-satellite digital radio. It is too early to speculate what the deal would bring for subscription prices. It could either reduce the cost of providing service - or give the company more pricing power by becoming the only satellite radio provider in the US. The companies will decide on a new name soon. They also need to decide where the new company will be based, as XM is based in Washington and Sirius is in New York. The new company’s board members will include Parsons, Karmazin, four independent directors (named by each company), and one representative each from Honda Motor Co. and General Motors Corp. This totals to 12 members in all. A Bear Stearns analyst opined in a research note that this merger stand a good chance of overcoming regulatory obstacles. However, other analysts remain unsure, such as Sanford C. Bernstein analyst, Craig Moffett, who gave the deal a “50-50” chance of passing regulatory hurdles. He felt that the deal could have problems getting through the FCC, and said it was “anyone’s guess” as to whether the FCC would change its rule or not. The ball is now in the court of FCC and everyone including XM and Sirius waits to hear the verdict with bated breath. ---------- Rahul Prabhakar is a contributing editor for TMCnet. To see more of his articles, please visit his columnist page. |