XM/Sirius Merger Brings Varied Responses

[Satellite News – 3-25-08] With the U.S. Department of Justice approval of the XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. merger, the only hurdle left for the two companies is approval from the U.S. Federal Communications Commission (FCC), which most industry observers think is likely within the next 30 days.
    While some greeted the news with jubilant headlines such as “Justice Delayed, But Not Denied” by analysts at Bear Stearns and “Wedding Bells At Last” by Cohen and Co., others viewed the approval as a failure of federal regulation.
     "We are astonished that the Justice Department would propose granting a monopoly to two companies that systematically broke FCC rules for more than a decade,” National Association of Broadcasters Executive Vice President Dennis Wharton said in a statement. “To hinge approval of this monopoly on XM and Sirius’s refusal to deliver on a promise of interoperable radios is nothing short of breathtaking."
    Roger Rusch, president of satellite consulting firm TelAstra, said FCC approval was likely, but a “sad policy decision.”
    “This decision places residents in rural regions at a competitive disadvantage since they do not have a good alternative to satellite radio,” Rusch said. “Such a decision would be a reversal of 30 years of deregulation that encourages competition and market forces rather than regulated monopolies. It would be unfortunate for the satellite industry because competition encourages innovation and a vital industry. Monopolies concentrate on preserving a sole source position, incompetence and decline. Competition leads to better service and lower prices for the public.”
    Cohen analysts Tom Watts and Shaun Parvez believe that the deal will increase uptake of satellite radio by consumers. “We believe one factor that has reduced penetration is consumers’ fear that they will choose the wrong service,” the pair said in a research note. “With the merger now closed and the availability of interoperable radios expected soon, we believe both retail adoption and [original equipment manufacturer] conversion should uptick.”
    While the impact on consumers from the merger is still anybody’s guess, the impact on XM and Sirius is more definite with the greatest source of synergy coming in marketing, the Cohen report said. “Each company currently spends between $450 to $500 million on sales and marketing, or a total of about $1 billion,” the report said. “While this number is unlikely to be cut in half, a 20 [percent] to 40 percent reduction may be possible if a combined entity is not competing for the same subscribers.”
    Additionally, Cohen predicts an eventual price increase that will, along with lower rebates and other discounts, increase average revenue per user for the company.
    Bear Stearns analysts also pointed out that the merger will allow XM to refinance its existing debt. “At its fourth quarter 2007 conference call, XM had disclosed that it was in discussions to potentially refinance debt with change of control provision likely impacting $600 million 9.75 percent notes, $200 million floating rate notes, and $230 million [of] satellite sale and leaseback debt.” Robert Peck, a research analysts, said in a research note. “While the credit environment is not very favorable, we anticipate the companies will be able to refinance the existing debt even if they have to pay some premium for rolling over the debt to the merged company.”
    Bear Stearns analysts feel FCC approval is likely within the next 30 days, and that any conditions to the merger will not be onerous. “With shareholder approval in November 2007, the only regulatory step left is the FCC approval,” Peck said. “Note, the FCC and [Department of Justice] likely coordinated their decisions, hence approval is not likely in question. The FCC chairman has stated that he has a very favorable opinion of the a la carte pricing schema proposed by Sirius and XM.”