Investors like sat radio linkup

Feds up in air

Shareholders of Sirius Satellite Radio and XM Satellite Radio are expected to approve a merger of the sat radio industry's two U.S. players in separate votes Tuesday, but the regulatory destiny of the deal remains foggy.

Tuesday's special shareholder meetings -- Sirius in New York and XM in Washington -- should approve the deal as big proxy advisory firms Glass, Lewis & Co. and RiskMetrics Group's ISS Governance Services unit have come out in support of it.

Once it passes the shareholder votes, though, the merger must win approval from the Justice Department and the FCC. While Justice looks at the deal for anti-competitive effects, the FCC has to decide whether the merger is in the public interest.

The merger review clock suggests a final decision by Dec. 6.

While a slew of lobbies -- including the American Trucking Assn., Americans for Tax Reform and the State Foundation -- have come out in support of the deal, opposition has been strong, and industry observers remain cautious about its chances of winning regulatory approval.

"The Street remains solely focused on the merger while ignoring the fundamentals," Banc of America equity research analyst Jonathan Jacoby said recently in reviewing Sirius and XM earnings. "Our contacts remain more skeptical than the Street, noting the high hurdle to demonstrate that this merger is not two-going-to-one, and we concur."

Citi Investment Research analyst Eileen Furukawa has been somewhat more optimistic. She recently noted that investors overall seem bearish as the current XM share price "reflects only 35% probability of merger success." She sees a high 60% chance of approval for the merger.

Meanwhile, Bear Stearns analyst Robert Peck said recently that he expected a regulatory decision "shortly" after the FCC came out with added questions for the two firms ahead of the commission's ruling on the proposed combination. Some observers said this could lead to a delay.

But Peck said: "Given the very specific questions, we wouldn't be surprised if the FCC were close to finalizing its order on the merger. In addition, the FCC has given XM and Sirius only two weeks to respond while not stopping the clock, which we think is also a positive as it suggests a degree of urgency on the part of the FCC."

Peck also said the request for added info means that the DOJ "likely is close to allowing the deal, which would necessitate the FCC to expeditiously complete the documentation process." Said the analyst, "If the DOJ were close to denying the deal, the need for such detailed information would not have arisen in the first place."

While several analysts think that the Justice Department is close to approval, it is difficult to fathom what Justice plans to do.

Sirius president and CEO Mel Karmazin has indeed promised lawmakers that customers of the combined company would not have to pay for channels they don't want. In testimony before Congress, he said the merged company would offer to sell subscribers different packages of channels on an a la carte basis.

For FCC chairman Kevin Martin, a la carte pricing is the holy grail. Martin has pushed all multichannel providers to offer a la carte pricing as way to allow viewers to screen out objectionable programming.

Karmazin, who would be CEO of the combined satellite radio provider, claims that listeners would benefit by getting the best of both services without having to pay for two subscriptions.

To bolster that claim, the companies propose a menu of pricing options: Subscribers could keep their current service at the same price they pay now, add the "best of" the other service for an extra $4 a month or choose to get fewer channels at a lower price.

The FCC has been under pressure from lawmakers on both sides of the debate, with more than 100 pushing the commission to reject the deal. The National Association of Broadcasters also has made the merger's rejection one of its key prorates, spending much money and political capital to defeat the deal.

Whichever way the regulators go, it probably won't be the last gasp; broadcasters are unlikely to give up, and Karmazin has said he will sue if the deal is rejected.

On Feb. 19, the first day of trading after the companies announced their intention to merge, XM stock popped 10% and Sirius rose 6%. Now, though, XM shares trade 2% below where they were before the merger plan was announced, and Sirius shares are off 8%.

Brooks Boliek reported from Washington; Georg Szalai reported from New York. Paul Bond in Los Angeles contributed to this report.