IP Democracy: XM, Sirius Want to Merge. Will the Feds Let Them?

Satellite radio rivals Sirius Satellite Radio and XM Satellite Radio announced yesterday the two companies plan to merge in a deal that would create a combined enterprise worth an estimated $13 billion. Stressing that the combination is a merger of equals, the companies have spelled out a stock exchange that will end up giving XM and Sirius shareholders 50% of the combined company.

Hollywood veteran and current Sirius CEO Mel Karmazin will become CEO of the combined company and XM’s current Chairman Gary Parsons will become CEO of the combined company. The board will consist of 12 directors, including Karmazin, Parsons, four independent members designated by each company as well as one representative each from investors General Motors and American Honda. Hugh Panero, CEO of XM, will leave when the merger closes.

XM and Sirius, beset by competition and increased costs as they outbid each other for top talent such as Howard Stern and Martha Stewart, claim the deal will help them create a radio powerhouse capable of surviving in the iPod and Internet radio era by enabling the combined company to offer “best of breed” programming. The combined company will have $1.5 billion in estimated annual revenue and serve a total of 14 million subscribers.

Given that each company uses different technology, XM and Sirius plan to develop a range of multi-functional devices capable of receiving the other’s signal, which would benefit chip makers and device manufacturers, not to mention consumer electronics retail outlets.

During a call held this morning to discuss the deal, Karmazin said that the merger will result in $3 billion to $7 billion in cost savings. Cash flow will ramp up as the efficiencies kick in and as the company leverages “the brightest minds and creative geniuses from both companies.”

The real challenge to the deal, however, is the uncertain ability for Sirius and XM to get the merger approved by the federal antitrust and regulatory authorities. The success in those endeavors depends very much on getting the feds to see that the mobile radio market is a lot bigger than just “satellite radio.” By merging together, Sirius and XM will eliminate altogether any competition in the satellite radio sector.

But, the companies argue, the market for radio services has mushroomed over the past ten years as Apple’s iTunes and Internet radio have swiped market share from both traditional and satellite radio providers. “Consumers today have a significantly broader range of audio entertainment options than was the case when we conceived our companies over ten years ago,” Karmazin said during the call. “I’m sure that the regulatory approval process is on everybody’s mind. I can assure that both companies have done their homework on this issue.”

Parsons underscored this point. “Satellite radio is still a small player by comparison with moderate market share against these giants,” specifically online radio channels that are available to 230 million PCs in the U.S. and the 39 million iPods in service.

Although the Justice Department might see the sense in the argument that the relevant market should be expanded to include these new forms of radio options, the tougher nut to crack will be the Federal Communications Commission, which has to approve the transfer of satellite licenses from XM and Sirius to the new company. To sway the FCC, the companies will have to argue that the deal is “in the public interest.”

“We would not enter into this deal if we were not confident that it is in the public interest,” Parsons said during the call. “We believe that a thoughtful analysis of that will clearly recognize the broader marketplace that is there.”

Despite the uphill battle in getting the feds to bless the deal, Sirius and XM are banking on receiving regulatory approvals within nine months, and closing the deal by year-end.

(Article reprinted from today’s IP Media Monitor.)

Posted by Cynthia Brumfield on February 20, 2007 1:14 PM to IP Democracy