Sirius and XM Plan $13 Billion Merger

But Move Needs to Clear FCC Regulatory Hurdles

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NEW YORK (AdAge.com) -- XM Satellite Radio and Sirius Satellite Radio, after much pushing by Sirius CEO Mel Karmazin, finally arrived at a deal to combine assets in a tax-free merger worth $13 billion.
Sirius CEO Mel Karmazin (above) would head the merged operation with XM Chairman Gary Parsons.
Sirius CEO Mel Karmazin (above) would head the merged operation with XM Chairman Gary Parsons. Credit: AP
The news follows months of rumors and concern that such a partnership could never be possible under FCC regulations. The two plan to argue, however, that given the full range of audio options available today -- including radio, digital radio and iPods -- combining would not create a monopoly that shuts out competition.

The merger would combine the two companies' 14 million total subscribers, and would be headed by Sirius CEO Mel Karmazin and XM Chairman Gary Parsons, who would maintain their positions under the new agreement.

"This is a very exciting day in our history," Mr. Parsons told investors in a conference call this morning. "A combined company will provide consumers with enhanced content and better choices ... and create significant value for shareholders."

Both parties hope to close the deal by year's end should the FCC approve the merger.

Just last month, when rumors swirled that the merger would be announced at the Detroit Auto Show, Chairman Kevin Martin said there was a prohibition against one entity owning two licenses in the noncompetitive satellite-radio industry. He changed his tune slightly yesterday, saying: "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."

Messrs. Karmazin and Parsons, however, both stressed that combining their assets would make satellite radio a bigger player in the audio-content realm. A PowerPoint presentation for investors this morning compared XM and Sirius' combined reach of 14 million subscribers to the 39 million iPod owners, 223 million AM/FM radio listeners and 237 million car owners. Even after the merger, the two companies would represent just a tiny slice of the $20 billion terrestrial-radio advertising market. In 2006, XM and Sirius grabbed just $70 million in ad revenue.

Still, mixed opinions on the proposal surfaced almost immediately after the news broke. "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," said Dennis Wharton, exec VP of the National Association of Broadcasters. "It bears mentioning that regulators summarily rejected a similar monopoly merger of the nation's only two satellite TV companies -- DirecTV and Dish Network -- just a few years back."

Investors, however, were much more optimistic. Merrill Lynch said FCC approval might be more likely under a Republican commission in advance of the 2008 elections, while James Goss of Barrington Research Institute said: "The benefits of a merger would be substantial, but realization of these benefits would be over an extended time frame. Some of the duplicate programming could be rationalized, but contract renewal benefits would take up to a half-dozen years. Total transformation of the satellite infrastructure would take at least as long. Beyond such specifics, the ability to create a positive economic model should be enhanced by this combination."

The news bumped up shares of both companies, with XM jumping 22% to $17.02, and Sirius rising 8.1% to $4, according to Bloomberg.
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