XM, Sirius Plunge After Merger Report

The Goldman Sachs report said the firms would have to take on more debt this year.
The Goldman Sachs report said the firms would have to take on more debt this year. (AP)
By Cecilia Kang
Washington Post Staff Writer
Friday, June 20, 2008

Days after the nation's top telecommunications policymaker signaled his approval of a merger between the two satellite radio providers, XM and Sirius, a negative report released yesterday on the future of the companies sent shares of each firm sharply lower.

XM Satellite Radio Holdings' stock fell 17 percent, to $8.61, and Sirius Satellite Radio's stock dropped 12 percent, to $2.13, yesterday. The declines followed a report by Goldman Sachs analyst Mark Wienkes saying that cash flows of the merged company would suffer as satellite radio services faced increased competition from MP3 players and other technologies such as streaming music on the new iPhone. He advised investors to sell the stocks, saying that even though the merger would help reduce costs, subscriber growth would slow and debt would mount over the longer term.

"With core demand for satellite radio falling amongst the younger demographics . . . we see long-term risk to the outlook," Wienkes said in the report.

XM, of the District, and Sirius, of New York, however, used the same arguments to persuade regulators at the Department of Justice and the Federal Communications Commission to allow the nation's satellite radio operators to become a monopoly.

FCC Chairman Kevin J. Martin said on Sunday that he would approve the merger and put the deal up for vote for the other four commissioners after the companies said they would commit to a list of consumer-friendly initiatives, including caps on prices for three years, interoperable radios for both services, and the allocation of some of their spectrum for broadcasting run by minorities and females.

Analysts have estimated that the merger would create cost savings of $4 billion to $5 billion through combined research and development, marketing, and sales. But analysts noted that it could take years before those benefits are realized.

Wienkes said in his report that the companies would probably have to take on additional debt of $500 million to $1 billion later this year.

April Horace, an analyst with the investment firm Janco Partners, said subscriber growth would slow for at least a year if the companies are merged because consumers would have to wait for new, interoperable radio receivers.

"People are going to wait until there is less confusion about what radios work and which ones don't," Horace said.

The merger has been heavily criticized by lawmakers and interest groups since the companies proposed a joint venture 16 months ago. Some have argued that consumers would have fewer choices of programming and radio receivers and would be charged higher prices because of a lack of competition.

They also pointed out that the FCC's approval would be a dramatic reversal of rules set in 1997, when the companies were given satellite radio licenses with the condition that they never merge.

Some members of the Congressional Black Caucus also have criticized the plan, saying commitments to lease 4 percent of their spectrum, or 12 channels, for minority-owned programming are not enough. Sirius's and XM's chief executives met with black lawmakers earlier in the week to gain support, which they have yet to obtain.

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