THE XM-SIRIUS DEAL MAY NOT FLY The combination needs approval from the FCC. But the commission's chairman is skeptical—and the regulatory body has rejected similar deals Phil Mintz – BusinessWeek The long dance that led XM Satellite Radio and Sirius Satellite Radio to agree to what's being termed a $13 billion "merger of equals" announced Feb. 19 may have been the easy part. Now the two companies need the Federal Communications Commission to go along. And that might very well be even tougher than reaching an agreement on how to combine the two long-standing rivals.
The long-rumored deal, unveiled on President's Day, looks a lot like an acquisition of XM by Sirius, despite the "merger of equals" language. XM shareholders will receive 4.6 shares of Sirius stock for each share they own and will get a premium of roughly 22% above the Feb. 16 closing price. Mel Karmazin, Sirius' chief executive, will take the CEO post at the combined company, while Hugh Panero, XM's chief executive, will not have an executive role. Gary Parsons, XM's chairman, will continue in that position at the combined companies.
"This combination is the next logical step in the evolution of audio entertainment," said Karmazin, in the merger announcement. "Together, our best-in-class management team and programming content will create unprecedented choice for consumers, while creating long-term value for shareholders of both companies.
The two companies also said in their announcement Monday that the transaction is subject to "regulatory review and approvals, including antitrust agencies and the FCC." But it doesn't explain how the merger, which the companies said they hope to close by yearend, is going to pass regulatory muster.
Precedent for Rejection On Jan. 17, FCC Chairman Kevin Martin told reporters that XM and Sirius' satellite radio licenses would preclude a merger. Shares of XM dropped 10%, and shares of Sirius dropped 7% that day. In a statement late Monday Martin said the companies would have to clear a high hurdle in making their case for the merger. "The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices," Martin said.
Industry observers note that the FCC has the leeway to change the rules or permit an exception, particularly if it concludes that satellite radio is just part of a larger constellation of providers, including traditional broadcast radio and the Internet. However, if you're looking for a precedent, you need go back no further than 2002, when the FCC rejected a merger between satellite TV companies EchoStar Communications and DirecTV Group on the grounds that it would have created a monopoly in rural areas. As the XM-Sirius merger gained steam last week, several investment analysts said that FCC approval was possible but not assured.
Industry Criticism Industry competitors are certainly going to put pressure on to block the merger. Within hours of the merger announcement, the National Association of Broadcasters, which represents broadcast stations, labeled it "anti-consumer" and called on the FCC to block it. The broadcasters took a swipe at an argument that proponents of the merger would be expected to use, that the two services are not profitable and are being hurt by competition.
"When the FCC authorized satellite radio, it specifically found that the public would be served best by two competitive nationwide systems," the NAB said a statement. "Now, with their stock prices at rock bottom and their business model in disarray because of profligate spending practices, they seek a government bail-out to avoid competing in the marketplace."
The FCC issue is just one of the questions that are going to face Karmazin and Parsons. But it may be the one with strongest likelihood of stopping the merger in its tracks. |