Sat radio rivals unveil merger agreement


Sirius Satellite Radio and XM Satellite Radio said Monday that they will merge to create a $13 billion entity, a scenario that would all but end an expensive bidding war for talent that the two have been waging but also will invite extensive scrutiny from lawmakers and over-the-airwaves radio broadcasters.

Laws prohibiting the two to combine have been in place since each were granted licenses about a decade ago, in effect creating a government-mandated duopoly because regulators had no intention of allowing other sat-radio operators to spring up in the U.S. Nevertheless, laws can be tweaked to grant permission for the two money-losing companies to merge, and that has competitors nervous.

Dennis Wharton, an executive vp with the National Association of Broadcasters, which represents traditional radio, said he'd be "shocked if federal regulators permitted a merger of XM and Sirius."

Others aren't so certain. Barton Crockett, an analyst with JP Morgan Securities, upgraded shares of XM and Sirius last month because of persistent and credible rumors that the two might "attempt a merger this year, with regulator approval a tossup."

Experts have been saying for months that approval of a combined XM-Sirius depends on how the FCC and anti-trust regulators view the industry. If considered broadly, with digital music players and the Internet thought of as competition, then approval ought to be granted. However, if the government sees competition for XM and Sirius stemming only from each other and from free radio, then approval isn't likely.

Sirius and XM said Monday that they're confident they will be a single company by the end of the year. What they haven't yet decided is what their new company will be called and where it will be headquartered. Sirius is based in New York and XM in Washington, D.C.

Sirius CEO Mel Karmazin and XM chairman Gary Parsons will have those titles at the combined company, while a role for XM CEO Hugh Panero -- if there is to be one -- is unclear, except that he will remain CEO of XM until the merger is consummated.

The new company would boast a $13 billion enterprise value and 14 million subscribers. Combined revenue last year was about $1.5 billion.

The terms of the deal, called a merger of equals, has shareholders of XM and Sirius owning about half of the combined company. Sirius will exchange 4.6 shares of its stock for each share of XM, putting about a $4.6 billion value on XM, about a 22% premium to where XM stock traded Friday.

The two companies have endured stock prices that swooned to the tune of almost 50% last year, though shares of both have been making a comeback lately. Shares of XM advanced 8% on Friday on no news, though pundits attributed the healthy gain to more of the same: merger speculation.

That XM and Sirius stock were in the doldrums last year -- in part because of their wild spending to line up exclusive radio content -- is, of course, a primary reason that so many investors and analysts have been clamoring for a merger. Asked late last summer about such a proposition, Karmazin said in an interview that merger discussions were not under way. He added, though, that he thought regulators might approve such a deal.

"There's a lot of competition for satellite radio. If there's a lot of competition, then the arguments of market power seem to go away," Karmazin said then. Sirius and XM executives did not return phone calls Monday but scheduled a conference call for today.

FCC chairman Kevin Martin also has weighed in recently. When he said last month that laws would prohibit an XM-Sirius merger, shares of both companies declined more than 6%. When he said a day later that rules could change to allow a merger, shares of each rose better than 4%.

That Sirius and XM have created their own problems by striking expensive deals in order to one-up each other is no reason for regulators to assist with merger approval, Wharton said.

"When the FCC authorized satellite radio, it specifically found that the public would be served best by two competitive, nationwide systems," Wharton said. "Now, with their stock prices at rock bottom and their business model in disarray because of profligate spending practices, they seek a government bailout to avoid competing in the marketplace."

The deal with the highest profile, of course, was shock-jock Howard Stern's $500 million agreement to serve up content on two Sirius channels for five years. Others include $220 million for the NFL over seven years at Sirius and $650 million for Major League Baseball for 11 years at XM. Oprah Winfrey signed on for three years at XM for $55 million, though the bulk of that programming consists of Winfrey's surrogates as opposed to Winfrey herself.

That the figures seem high to some, including one XM board member who quit in protest, is the result of bidding wars between the two, perhaps best illustrated by NASCAR's recent move from XM to Sirius. XM paid NASCAR $15 million for a five-year period that ended this year, while Sirius shelled out $107.5 million for the next five years.

Fox News, television's No. 1 cable news channel, also took advantage of the rivalry between Sirius and XM, extending its existing relationship with XM last year though not initially with Sirius, which balked at a price increase, according to insiders. The dust-up had XM boasting for a few weeks that it was the exclusive sat-radio home of Fox News until Sirius agreed to paying a significant hike in fees.

In their statement to the press Monday, Sirius and XM executives seemed to be pleading their case that a combined company would better serve consumers with greater programming choices, lower cost and quicker technological advances.

"This combination is the next logical step in the evolution of audio entertainment," Karmazin said. "Together, our best-in-class management team and programming content will create unprecedented choice for consumers, while creating long-term value for shareholders of both companies."