Sirius Sees Benefits in Potential Merger With XM

By Chris Kirkham
Washington Post Staff Writer
Friday, December 8, 2006

Executives of Sirius Satellite Radio are again hinting at a potential merger with XM Satellite Radio that they say would bring strong gains for investors.

Their statements boosted the stock prices of Sirius and XM this week, though both settled by the end of trading yesterday.

In two speeches in New York on Wednesday, Sirius executives mentioned "significant benefits" and "value creation" from a combination of the two radio companies.

"Consolidation creates value . . . particularly when you are in the same industry as another company to be able to combine," Sirius chief executive Mel Karmazin said. He and David J. Frear, Sirius's chief financial officer, spoke to analysts at a conference.

It is not the first time Sirius has dropped such a hint. Karmazin began his tenure at Sirius in early 2005 with media speculation about merger talks, which both companies denied took place. Since then, he has referred to the logic of a merger in calls with analysts.

A spokesman for XM declined to comment on what he called "speculation," and officials from Sirius did not return calls yesterday.

XM and Sirius are both wrestling with slowing subscription growth and huge debt. Neither company has yet earned a profit, though XM projects it will break even next year.

XM has more subscribers. Analysts estimate that the company has about 8 million, compared with about 6 million for Sirius. But it has about $1.3 billion in long-term debt, $3 million more than Sirius.

The two companies have scaled back subscriber projections in recent months.

"Both companies are realizing that the period of hyper-growth may be coming to a completion, and the stage of growth combined with cash creation will require more efficiencies," said Frederick W. Moran, a media stock analyst with the Stanford Group based in Boca Raton, Fla.

"Both Sirius and XM could prosper much more easily if they took up the fight against terrestrial radio operators, rather than against each other," Moran said. Sirius has a deal with radio host Howard Stern and rights to National Football League games. XM has rights to Major League Baseball games.

If the companies proposed to merge, the Federal Communications Commission and the Justice Department would review the case for antitrust concerns. The biggest question would be how the market is defined.

Experts say a strict interpretation of the satellite radio market by regulators would make a merger more difficult because an XM-Sirius combination would have monopoly power. If the market is interpreted more broadly to include on-demand MP3s or podcasts or traditional radio, a merger might go through more easily.

"If you define the market narrowly to be satellite radio, it's a two-to-one merger, which would raise red flags all over the place," said Luke M. Froeb, a professor at Vanderbilt University's Owen Graduate School of Business who used to analyze mergers at the Federal Trade Commission.

The idea of a satellite radio merger recalls a similar proposal in 2002 by satellite TV providers EchoStar Communications and DirecTV. That deal was rejected by the FCC and the Justice Department, which defined the satellite television market as separate from cable television.

The Justice Department would consider whether an XM-Sirius merger would lead to price increases of more than 5 percent. But for two companies still operating at a loss, it's difficult to say how much power they would have over the industry, said Mark Cooper, director of research at the Consumer Federation of America. "Because the industry is so new, we don't really know what the price equilibrium should be," he said.

Sirius stock closed yesterday at $3.88 a share, up 5 cents. XM closed at $14.81 a share, up 11 cents.

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