XM and Sirius, the two satellite radio companies that have spentmillions of dollars trying to woo pay-for-service customers,yesterday announced plans to merge in hopes of stemming losses andoffering an even larger smorgasbord of music, talk and sports.
If approved by federal regulators, the merger would give allsatellite subscribers access to Sirius's Howard Stern, pro footballgames and NASCAR races, as well as XM's Oprah Winfrey, Major LeagueBaseball and Bob Dylan.
Before XM Satellite Radio Holdings of the District and SiriusSatellite Radio of New York can combine, however, the companies mustpersuade the Justice Department and Federal CommunicationsCommission that they are complying with antitrust laws, a claim thatland-based broadcasters and consumer groups are likely to dispute.XM and Sirius contend that customers have ample audio choicesthrough devices such as iPods and cellphones.
The FCC bars a single company from controlling the satelliteradio market, but FCC Chairman Kevin J. Martin recently noted thatsuch rules can be changed. Martin said yesterday that the hurdle"would be high. . . . The companies would need to demonstrate thatconsumers would clearly be better off with both more choice andaffordable prices."
Officials said the new company's name and headquarters would bedetermined later. Customers, who now pay $12.95 per month for eachcompany's service, would be able to choose a cafeteria-style rangeof channels.
"In fact, it will become a company with greater consumer choice,"said Gary M. Parsons, chairman of XM. "Certainly, two companiescombined would be a much stronger programming lineup."
The merger would be a milestone in the evolution of commercialradio. XM and Sirius, founded in the early 1990s, predicted thatenough people would be willing to pay for a wide array of radiochoices -- with clear reception, no fundraising appeals andcommercial-free music stations -- to allow the providers to turn aprofit.
But their bidding war for on-air talent escalated dramatically.Sirius spent $500 million over five years to employ Stern, whoearned another $300 million in stock for meeting certain subscribergoals. XM signed Winfrey to a three-year, $55 million contract. Bothcompanies have spent millions of dollars on professional sportsdeals.
Sirius has reported losses of $3.4 billion over five years. Inmid-2006, XM reported a quarterly loss of $231 million, but thecompany said it had a positive cash flow by the year's end.
Both firms' stocks have experienced a bumpy ride over the pastseveral years. Shares of XM, which number more than 300 million,soared to nearly $40 in 2005 but closed Friday at $13.98 per share.Sirius, which has more than 1.4 billion shares, reached nearly $9 atits peak in 2005. Sirius shares closed Friday at $3.70 per share.
In a joint statement, Sirius and XM executives called theproposed deal an "all-stock merger of equals" with a combined"enterprise value" of about $13 billion. The figure is theirestimation of the combined operation's worth, including net debt ofabout $1.6 billion.
XM shareholders would receive 4.6 shares of Sirius common stockfor each XM share they own. Mel Karmazin, chief executive of Sirius,would become the new company's chief executive. Parsons, chairman ofXM, would become chairman of the merged company. The new company's12-member board of directors would include Karmazin, Parsons andfour independent members designated by each company. General Motorsand American Honda, which include satellite radio as a standardfeature in many new cars, would each provide one board member.
"We believe the standard for approving the deal is whether thisis in the public interest," Karmazin said in a conference call withreporters. "We believe there is tremendous benefit that accrues tothe public."
Officials said they hope to complete the merger, which wasapproved by the boards of both companies, by the end of the year.
XM and Sirius face emerging competition from the conversion of AMand FM stations to digital broadcast signals. Traditional analog AMand FM broadcasts provide only one channel per frequency and limitedsound quality. In the past few years, however, most AM and FMstations have converted to digital signals, which improves soundquality and gives them the ability to broadcast "side channels" inaddition to their main frequencies.
The proposed merger also faces significant regulatory andtechnological hurdles. The most recent merger attempt comparable tothe XM-Sirius proposal came in 2002, when the satellite TV companiesEchostar Communications and DirecTV tried to merge. The twocompanies told the FCC and the Justice Department that they neededto combine resources and expand programming to compete against whatthey called the "monopoly" of cable-TV providers. They promised morechannel choices and the rollout of high-speed Internet access viasatellite. The FCC and Justice Department rejected the merger,calling it a clear-cut "two-to-one" deal that would probably resultin higher prices for satellite-TV subscribers.
William Baer, an antitrust lawyer at Arnold & Porter, saidregulators would give the proposed merger a close look. "It comesdown to price competition," Baer said. "At the end of the day, theyhave to be able to show that the pricing of satellite radio is goingto be constrained by these alternative forms of listening, such asstandard radio, iPods, Internet radio and cellphones. The questionthat the Department of Justice will look at is whether satelliteradio prices will go up if there is only one provider tomorrow."
Rebecca Arbogast, a telecom industry analyst for the brokeragefirm Stifel Nicolaus, said XM and Sirius were smart to start themerger effort in time to complete it before Democrats have thechance to win the presidency -- and appoint top Justice Departmentand FCC officials. "If they waited until a Democratic attorneygeneral were in place, then it would be a much closer call,"Arbogast said.
To help the proposed XM-Sirius merger at the FCC, Sirius hashired the communications law firm Wiley Rein of the District.Managing partner Richard E. Wiley is a former FCC chairman. Martin,the FCC chairman, is a former associate of the firm.
The proposed XM-Sirius merger will face opposition from theNational Association of Broadcasters, the trade group of AM and FMradio stations, and local television stations, which has fought thesatellite radio services on various fronts since their inception.
"Given the government's history of opposing monopolies in allforms, NAB would be shocked if federal regulators permitted a mergerof XM and Sirius," NAB spokesman Dennis Wharton said in a statement."In coming weeks, policymakers will have to weigh whether anindustry that makes Howard Stern its poster child should be rewardedwith a monopoly platform for offensive programming."
The NAB has fought XM's rollout of local traffic and weatherchannels, now in 21 areas, including the District and Baltimore. TheNAB says the move violates the spirit of the FCC's intention tolicense a national satellite radio service. Radio stations in thoseareas fear losing advertising to XM, which airs commercials on itstraffic and weather reports, unlike its music channels.
Gene Kimmelman of Consumers Union said his organization will"raise some antitrust concerns, forcing Justice to look at whetherthere's a unique satellite market that needs to be preserved withcompetition."
If the merger is approved, XM and Sirius must reconcile differentforms of satellite technology. XM's two satellites are in low-angle, geo-stationary orbit in the Southern sky above the UnitedStates. Sirius's three satellites orbit in a figure-eight over NorthAmerica. Because Sirius's satellites are directly overhead, theirsignals are less likely to be blocked by tall buildings, trees andmountain ridgelines to the south. However, because the Siriussatellites move in the sky throughout the day, Sirius customers withstationary units sometimes have to move their antennas from one sideof the house to another. The problem is less pronounced for Siriusmobile units, such as in cars.
Both services augment their satellite feeds with hundreds ofterrestrial "repeater" devices mounted on structures around thecountry that help broadcast the signal in high-density areas, suchas cities.
Sirius struggled with management and technical problems and fellbehind XM early on, then surged ahead by launching its firstsatellite in 2000. XM beat Sirius to rollout, launching its servicein September 2001. Sirius made a limited rollout five months later.By the end of 2006, Sirius had 6 million subscribers to XM's 7.6million.
XM subscriber John Goodman of Tuckahoe, N.Y., said he has severalquestions about how the deal will affect him.
"My biggest question is what happens to my XM receiver," Goodmansaid. "I have spent over $100 on my XM receiver so I can listen tothe Red Sox games when I'm in the house or outside. How does allthis impact me?"
Staff writer Frank Ahrens and staff researcher Karl Evanzzcontributed to this report.
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