Sirius Radio to buy rival XM

$4.57 billion stock deal would combine pay satellite competitors

February 20, 2007|By Phil Rosenthal | Phil Rosenthal,Chicago Tribune

Radio's space race may be over.

The nation's two satellite pay-radio services - market leader XM Satellite Radio Holdings Inc. and rival Sirius Satellite Radio Inc. - said yesterday that they intend to join forces, stemming a flood of red ink in a $4.57 billion stock deal that will result in a single service with 14 million subscribers.

But the merger must clear several significant regulatory hurdles. That could prove as difficult as hitching Howard Stern with Oprah Winfrey. (Stern is a big draw at Sirius, and Winfrey has a channel exclusively on XM.)

Determining government approval will be the same critical issue that nearly all media companies face these days: What exactly constitutes a media monopoly when entertainment and information is available to consumers from a growing number of sources and technologies?

"This is a merger proposal that merits the utmost scrutiny ... as to its effect on consumers of pay radio, as well as how this proposal impacts broader policy goals of ensuring diversity, localism, and innovation in radio service generally," said Rep. Edward J. Markey, the Massachusetts Democrat who chairs the House Subcommittee on Telecommunications and the Internet.

Federal Communications Commission Chairman Kevin J. Martin predicted "the hurdle here ... would be high" because the FCC originally ruled against allowing a single company to hold the only satellite radio license.

But much has changed since the FCC made that call in the 1990s. And XM and Sirius will argue that having two satellite radio outfits is not what kept subscription prices in check and encouraged innovation. They will say that happened because they compete with broadcast radio, iPods, Internet and mobile phones in an increasingly crowded media marketplace.

XM Chairman Gary Parsons is to become chairman of the new company, while Sirius chief executive Mel Karmazin will be CEO. They will serve on a board with 10 others, including members from General Motors Corp. and Honda Motor Co.

Hugh Panero, XM's CEO, will remain until the deal closes, which the companies say could come as soon as the end of 2007.

The transaction is billed by XM and Sirius as a tax-free, all-stock merger of equals, resulting in combined enterprise value of about $13 billion, including debt of roughly $1.6 billion.

In fact, Sirius is buying half of XM for $4.57 billion in stock. XM shareholders will receive 4.6 shares of Sirius common stock for each share of XM they own.

The deal values XM at $17.02 a share, a 22 percent premium over its Friday close of $13.98. Sirius closed Friday at $3.70 a share. U.S. markets were closed yesterday.

For consumers, who have had to choose one service and its programming, the merger brings together Sirius' Stern and XM's Winfrey, Sirius' National Football League broadcasts and XM's Major League Baseball, and other previously exclusive talk, sports, music and news programming.

It also promises to help car buyers hamstrung by the exclusive arrangements that XM and Sirius have made with automakers.

"It's been a bummer that when you buy a GM, you can't listen to Howard Stern or the NFL, or you're a baseball fan and you go to buy a Ford, you're out of luck," said Ryan Saghir of Orbitcast.com, a Web site dedicated to satellite radio.

As for whether satellite radio users will have to buy new radios, pay more or have to select different packages, Sirius said it's too soon to know.

Sirius and XM did say they planned to offer consumers the ability to cherry-pick the channels and content they want. This might be seen as a way to placate the FCC's Martin, who has advocated a la carte programming for cable TV.

XM has about 56 percent of all satellite subscribers, but Sirius has been narrowing the gap. The two companies could see savings of $3 billion to $7 billion in synergies, according to analysts.

The two have lost a combined $7 billion or so over the last eight years even as they increased subscribers.

The National Association of Broadcasters, which represents the broadcasting industry, voiced its opposition to the merger, noting that regulators rejected a similar merger proposal of DirecTV and DISH Network, the only two satellite TV companies.

Dennis Wharton, the association's executive vice president, said: "Policymakers will have to weigh whether an industry that makes Howard Stern its poster child should be rewarded with a monopoly platform for offensive programming."

Phil Rosenthal writes for the Chicago Tribune.

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