Satellite Radio Merger More Likely than Ever
The Federal Communications Commission’s (FCC) five commissioners finally appear close to approving Sirius Satellite Radio’s (SIRI) purchase of XM Satellite Radio (XMSR). The two companies have been put through the wringer over the last 17 months as they have lobbied and petitioned their case to merge in order to stay competitive. The negotiations and deliberations became embroiled in Washington D.C. politics—which inevitably takes a lot of time—but it appears as if approval is, at long last, at hand.
It is surprising that the deliberation lasted this long because, as we see it, XMSR and SIRI are really not competing against each other but against every other alternative provider of music (and there are many). Consumers have a myriad of options when it comes to how they receive their music entertainment and combining the only two major satellite radio providers is far from guaranteeing success in this highly competitive industry. On the contrary, the FCC would be doing consumers a huge disservice were it to not approve the merger. The companies have struggled to be profitable on their own and both are saddled with significant amounts of debt. Realistically, how long could they continue to hemorrhage cash year after year before succumbing? A month ago, Sirius issued a statement estimating $400 million of deal synergies, most to be realized within the first year. This merger is the best option to give satellite radio a chance to remain a viable competitor in the industry for the long-run.
The political sideshow of these negotiations should not be ignored. XM and Sirius shareholders have been vocal about their disgust for the delayed decision of the FCC commissioners and admittedly it has taken too long to get to this point. A month ago, FCC Chairman Kevin Martin (Republican) said he would vote to approve the merger as long as the companies conform to certain guidelines. Among his demands: (1) freeze prices for three years, (2) devote 8% of programming to educational or minority-owned channels and (3) offer consumers more choices in terms of a la carte pricing. The companies consented to the restriction on pricing, etc., which demonstrates how important they believe the merger is to their future. Not to be out-done, Commissioner Adelstein (Democrat) was willing to trade his vote for 6 years of price caps and more programming set aside for minority interests and education. This was asking too much of the companies and they balked, thus losing his vote, which would have assured FCC approval.
Pressure has mounted on XM and Sirius as their stocks have languished during the extended merger approval process. Both companies have lost more than 30% of their market cap since the deal was first announced and they do not want to drag this out any longer given the likelihood of a political shake-up in Washington after the fall elections as they might have to deal with an entirely new FCC panel. The companies hope to put this mess behind them and focus on having a big holiday season. They hope to have an interoperable radio within the year, as existing radios cannot carry both signals. Assuming rapid merger approval, Ockham likes the value represented by the combined company and believes that it will be a formidable competitor in this highly competitive field.
Ockham Research Staff @ July 24, 2008
