STOCK WATCH


Future of XM Satellite and Sirius: Up in the Air

Bob Frick

A proposed merger would save the two satellite radio companies piles of cash. But what are the chances the combination will actually happen?



The broadcasting business fears that the union of XM Satellite Radio and Sirius Satellite radio will form an unholy, monopolistic alliance. Stockholders of both companies won’t see any real money from either stock for years unless a merger does happen. Many analysts give the union 50-50 odds of success, at best.

When the legal dust clears, stockholders’ prayers should be answered. But put aside the will merge/won’t merge question for a second, and look at the situation from a strictly financial point of view.

The world’s only two satellite radio companies effectively proposed on February 20 that they pool their red ink. For their last full year of financial results, 2005, they lost $1.5 billion combined, slightly more than the $1.4 billion they dropped in 2004. Losses for this year will be around $2 billion.

One thing that’s killing both companies is competition with each other. Both have spent vast sums, for example, on pay packages that dwarf even Major League baseball salaries. Sirius, whose shares (symbol SIRI) closed Tuesday at $2.92, up 6%, is paying shock and smut jock Howard Stern $500 million for a five-year deal. XM (XMSR), which closed at $15.41, up 10.2%, has an agreement with Oprah Winfrey that will pay her $55 million over three years. Meanwhile, the two companies subsidize new subscribers to get them hooked and spend millions in marketing to establish brand dominance.

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Were a merger to take place, the savings would be substantial. Wedbush Morgan analysts William Kidd and Jung Hwang see the companies saving $50 million to $100 million a year combined just because there would be less competition for programming. Because the companies’ satellites are redundant, the combined entity could phase out one broadcaster’s fleet. Add in savings on marketing and other expenses, and the two could see total savings over time of $3.6 billion to $3.9 billion, the analysts say. And that’s a conservative estimate. Even with those savings, when would the XM-Sirius combination be profitable? It’s hard to find an analyst who will predict that.

Now on to the chances of a merger. The National Association of Broadcasters quickly pointed out that the Federal Communications Commission has a 1997 rule that prohibits the merger. The FCC chairman let it be known that prospects are not good.

Ironically, the two companies seem to be doing better in recent quarters, which may work against their merger hopes. XM’s third-quarter loss last year fell to $84 million, from $132 million for the same quarter in 2005. And a deal with General Motors means that hundreds of thousands of cars come with XM radios pre-installed. Sirius’s operating loss for its third quarter was $154 million -- its lowest in years. It has also increased its subscriber base substantially.

Why is that bad news for a merger? Bill Wycoff, antitrust expert for law firm Thorp Reed & Armstrong, points out that companies that are in bad financial shape are more likely to be allowed to merge, despite antitrust concerns. Even a glimmer of financial hope works against XM and Sirius. At first glance, regulators’ barring the merger is a “no-brainer,” Wycoff says.

However, he says, other factors point to the opposite conclusion. Is there a likelihood one of the companies will go out of business eventually? Yes. And that may persuade the FCC and the Justice Department to show leniency. Also, he says, while a merger would create a satellite radio monopoly, it wouldn’t create a radio monopoly, and certainly not a music monopoly. Sources of programming and music are only increasing. “You can buy any song for your iPod for 99 cents, and there’s Internet radio as well,” Wycoff says.

Finally, he says, the Bush administration is favorably inclined toward mergers and market concentration. One reason Wycoff thinks XM and Sirius pushed for a merger now is because of the possibility that a Democrat will win the White House in 2008.

From a practical point of view, will the merger allow monopoly pricing that would hurt consumers? Doubtful. Both companies struggle to get $13 a month from subscribers, and as Wycoff points out, consumers have plenty of choices they can turn to for content. The ones most likely to be hurt by a merger are the likes of Oprah and Howard Stern, who presumably wouldn’t be able to negotiate such outrageously lucrative new contracts. Boo hoo.




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