Hurdles for XM, Sirius Union | Adweek Hurdles for XM, Sirius Union | Adweek
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Hurdles for XM, Sirius Union

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LOS ANGELES The moment Sirius Satellite Radio and XM Satellite Radio said they planned to merge, the debate began over whether government regulators should let them.

First, it comes down to whether the FCC will decide that its 10-year-old proclamation that the two should not merge ought to be changed in light of new competition coming from the likes of digital music players and Internet radio.

Then, the Department of Justice needs to be convinced that a merger won't create a monopoly that could be used to take unfair advantage of the competition and, in doing so, harm consumers.

Sirius plans to exchange 4.6 of its shares for each XM share to create a single subscription-radio firm with an enterprise value of $13 billion, about half that of Clear Channel Communications, the behemoth of free radio.

Among the skeptics is investment firm Wachovia, which places the odds of the deal receiving regulatory approval in its current form at 25 percent or less. In any form, the odds go up to just 50 percent, about where the bulk of Wall Street's analysts seem to be.

"Regulatory approval is the obvious challenge," Wedbush Morgan Securities analyst William Kidd said. "We think the likelihood of approval is below 50 percent."

Kidd said he expects the National Association of Broadcasters to step up its campaign in opposition to the merger. NAB evp Dennis Wharton already has called the plan an "anti-consumer proposal" that would amount to a "government bailout to avoid competing in the marketplace."

"Traditional radio is already struggling against two satellite radio powers," Kidd said. "Surely, the thought of battling one satellite radio superpower must be daunting."

Likewise, Miller Tabak + Co. analyst David Joyce said he gives a Sirius-XM merger about a 50-50 chance and adds that the intent of the companies to close the deal this year is "moderately optimistic."

"I'm sure the regulatory approval process is on everybody's mind," Sirius CEO Mel Karmazin told analysts during a conference call Tuesday. "We believe there's a solid basis for approval and are committed to work with regulatory agencies to assure this approval."

Karmazin would retain the same position if the merger gains approval.

Wall Street, though, remained unconvinced. While XM shares rocketed 10.2 percent higher Tuesday to $15.41, shares should be trading north of $18, based on where Sirius shares were at Tuesday and on proposed financial metrics of the merger agreement.

Sirius and XM executives will be making the case that a single, financially fit satellite radio firm will benefit consumers in many ways, including by way of the creation and adoption of quicker technological advances and through better and more content.

FCC chief Kevin Martin released a statement shortly after Monday's merger intentions were made public, saying, "The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices."

Patrick Campbell, a partner with the law firm Paul, Weiss in Washington, suggests that the obvious step might involve XM and Sirius promising not to raise subscription prices once merged.

"My prediction is they get this done, one way or another, even if it means getting creative," Campbell said.

The FCC is made up of three Republicans and two Democrats, and it could come down to party lines.

"Republicans on the FCC are more free-market-oriented, and the Democrats are more leery of mergers because of their potential to harm consumers," Campbell said.

Pundits, naturally, point to the unsuccessful merger attempt of EchoStar Communications and DirecTV, but the comparison is by no means perfect because some areas of the country are not served by cable TV, so reducing a consumer's option down to one satellite operator could be seen as problematic.

"But everybody has access to at least some terrestrial radio," Campbell said. "A radio and an iPod are more ubiquitous than cable TV is. There aren't many who count on satellite radio as their only form of electronic entertainment."

Congress is likely to get into the act as well. Rep. Ed Markey, D-Mass., chairman of the House telecommunications subcommittee, already has indicated that he plans to examine the deal with a skeptical eye.

Some observers, in fact, have speculated since last year that Sirius has been hurrying to close a deal with XM before the 2008 election, lest a Democrat be elected to the presidency and corporate mergers receive more scrutiny.

Merrill Lynch analyst Laraine Mancini said Tuesday, "FCC approval is more likely under a Republican commission in advance of the 2008 elections."

—with Brooks Boliek