Sirius, XM Plan to Unite

LOS ANGELES Sirius Satellite Radio and XM Satellite Radio said Monday that they would merge to create a $13 billion entity, a scenario that would end an expensive bidding war for talent that the two have been waging but also would invite extensive scrutiny from lawmakers and terrestrial 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 mandated duopoly because regulators had no intention of allowing other satellite 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, evp at the National Association of Broadcasters, which represents traditional radio, said he’d be “shocked if federal regulators permitted a merger of XM and Sirius.”

Experts have been saying for months that approval of a combined XM-Sirius depends on how the FCC and anti-competition regulators view the industry. If considered broadly, with digital music players and the Internet seen as competition, approval could be granted. However, if the government views 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 would be a single company by year’s end, but they haven’t decided what the new entity would be called, nor the location of its headquarters. 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 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.

According to the terms of the deal, called a merger of equals, shareholders of XM and Sirius would own about half of the combined company. Sirius would exchange 4.6 shares of its stock for each share of XM, putting a $4.6 billion value on XM, about a 22 percent premium on XM’s Friday closing price.

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 percent. When he said a day later that rules could change to allow a merger, shares of each rose better than 4 percent.

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 dustup had XM boasting for a few weeks that it was the exclusive sat-radio home of Fox News until Sirius agreed to pay a significant hike in fees.