By Sam Diaz
Washington Post Staff Writer
Thursday, April 26, 2007

It is unlikely that federal regulators will give a thumbs-up to a proposed merger between the XM and Sirius satellite radio companies, according to three analysts' reports issued this week.

The separate reports, issued Monday as a preview to quarterly earnings announcements by XM today and Sirius on Tuesday, point to the drop in value of the shares of both companies -- about 30 percent each -- since the merger plan was announced Feb. 19.

In a Banc of America Securities report, analyst Jonathan Jacoby put the probability of approval of the merger at about 35 percent, but noted that it was likely much lower. Separately, Craig Moffett, a senior analyst with Sanford C. Bernstein & Co., and William Kidd, a media analyst with Wedbush Morgan Securities in Los Angeles, put the chance of approval closer to 10 percent.

A merger would need approval from the Justice Department, the Federal Communications Commission and shareholders.

"The merger faces a very tough road at the FCC, where the public interest test applied by the commission is inherently subjective," Moffett said. "In Washington, 'subjective' is codeword for 'political.' "

The decline of the companies' stock, analysts say, has less to do with the merits of the merger than with its prospects. They cited the political climate in Washington, where lawmakers have grilled Sirius chief executive Mel Karmazin about antitrust concerns during four hearings on Capitol Hill, as the driving force behind Wall Street's pessimism.

Since Monday, Sirius's stock has fallen 4.4 percent, closing at $2.83 yesterday. XM has fallen 2 percent, closing at $11.01 yesterday.

Within hours of the merger announcement, FCC Chairman Kevin J. Martin noted that the merger had a high hurdle to clear, and referred to a prohibition imposed when the agency approved satellite radio licenses 10 years ago. The National Association of Broadcasters, which represents traditional radio stations, has launched a lobbying campaign against the merger.

From a consumer standpoint, a merged company might provide a better programming lineup and would likely be better positioned to offer advanced features, such as video channels, Kidd said.

In hearings, the companies have been pressed to offer specifics about pricing and the compatibility of an estimated 14 million satellite radio receivers in use. Karmazin has promised that no receiver would become obsolete. He has also said, without specifics, that consolidation of programming would allow the merged company to offer tiered pricing packages, including a basic lineup that could cost less than the current $12.95 monthly subscription fee charged by both companies.

"The fact that there are different pricing schemes means you can effectively bake in price hikes," Kidd said. "Regulators can see that's a problem."