In February, when Sirius Satellite Radio Chief Executive Mel Karmazin announced plans to merge his company with rival XM Satellite Radio, he pegged the chances of winning deal approval from regulators at "better than 50%." At the time, many investors and analysts agreed with his math.
Two months and four congressional hearings later, the optimism has waned. XM (XMSR) shares closed Apr. 30 at $11.98, 22% lower than when the merger was announced Feb. 19. Sirius (SIRI) stock is down 24%, to $2.99. The swoon is related in part to lackluster results (XM said on Apr. 26 it added half as many subscribers in the first quarter as a year earlier; Sirius reports first-quarter results May 1).
Nevertheless, Wall Street is ratcheting down expectations that XM and Sirius will gain approval from the Justice Dept. and the Federal Communications Commission for their planned $13 billion transaction. "The market is telling us the chances have gone down," says Kit Spring, an analyst with Stifel Nicolaus & Co. He says there's a one-in-four chance.
Open Playing Field
XM and Sirius have hired powerful lobbyists and advisers to plead their case in Washington. Counsel includes law firm Wiley Rein (one partner is former FCC chairman Richard Wiley). The companies have also retained at least one former FCC commissioner and several former FCC staffers for behind-the-scenes lobbying, BusinessWeek.com has learned.
While the licenses issued to XM and Sirius in the 1990s bar the pair from merging, the companies argue that new technologies, such as HD Radio, music-playing mobile phones, and Apple's (AAPL) iPod now compete with satellite radio directly. So merging wouldn't significantly weaken competition, they say.
As valid as the argument may be, analysts aren't ruling out the prospect that another player may enter the game. CBS (CBS), owner of radio, TV, and advertising businesses, could bid for either satellite service provider while the merger is up in the air. "A possible CBS bid for XM or Sirius would face less risk of rejection [than the merger]," Blair Levin, an analyst with Stifel Nicolaus and a former FCC staffer, recently wrote in a note. CBS did not return a request for comment.
A third party could step in if the merger's chances continue to fall, as they might. "The current FCC has been fairly sympathetic to mergers," says Dave Farber, former chief technologist at the FCC and publisher of the influential Interesting-People mailing list. "But when you get to the number of survivors getting to one, they get nervous. There are going to be problems."
Hill of Objections
Some of the biggest are coming from Capitol Hill, where legislators have examined the implications of the deal in no fewer than four hearings. "You've got some high hurdles to overcome," House Committee on the Judiciary Chairman John Conyers (D-Mich.) said on Feb. 28.
Thesentiment was even more pronounced two months later, at an Apr. 27 hearing before the Senate Committee on Commerce, Science, and Transportation. "The merger proponents, in this case, have a steep hill to climb," said committee Chairman Daniel Inouye (D-Hawaii). "Indeed, given the public interest in promoting competition and maximizing a diversity of media outlets, we should be skeptical of claims that new technologies necessarily change the equation and provide competition sufficient to restrain monopoly power."
Congress doesn't rule on mergers. But it can influence regulators. And comments from that camp aren't too encouraging, either. At the recent NAB2007, a broadcasting industry trade show, FCC Commissioner Michael Copps said the companies seeking approval face "a pretty steep climb." At an April meeting of the Federal Communications Bar Assn., FCC Chairman Kevin Martin joked that he heard several names were in the running for the merged company, adding, "the smart money is on AT&T." Jokes aside, "my impression is that it's not going to happen," says Craig Mathias, founder and principal of telecommunications consultancy Farpoint Group.
If the deal falls through, few players would be happier than the National Association of Broadcasters. The trade group has already sponsored two studies critical of the deal. Both were released in April. One is by Philip Napoli, director of the Donald McGannon Communication Research Center at Fordham University, and the other came from The Carmel Group, a consulting firm. "America can't let Mel Karmazin sell it [on] 'less is more,'" the Carmel report said.
Findings of a sponsored study may be suspect, of course, but XM and Sirius have been criticized for not firing back swift rebuttals. The NAB also has retained former Federal Trade Commission Chairman James Miller, who recently authored and sent a letter in opposition to the proposed merger to members of Congress. "They've been a lot more successful in rallying their forces," says Richard Doherty, director at consultancy the Envisioneering Group, about the NAB.
Adding to the roadblocks, analysts are casting doubt on the projected cost savings the merger would yield. In an Apr. 26 report, Bank of America (BAC) analyst Jonathan Jacoby said he believes that if the deal goes through, the combined company will have to pay higher programming fees to broadcast their baseball and football programs. As a result, Bank of America recently trimmed its forecast of anticipated savings to $3.6 billion, from $5 billion.
Still a Long Way to Go
To be sure, there's plenty of time to win over skeptics, be they shareholders, legislators, or regulators. Sirius and XM have said from the start their union wouldn't stifle competition. Karmazin himself has said he'll take the steps needed to ensure the deal wins approval (see BusinessWeek.com, 3/1/07, "XM-Sirius Grilled on the Hill").
The companies are likely to file more extensive reports outlining their stance in the coming weeks, while the FCC solicits input from the public. The Justice Dept. isn't expected to make its decision until late summer or early fall. FCC approval could take even longer. "We continue to believe we will ultimately receive the necessary approvals," Hugh Panero, chief executive officer of XM, said during a conference call Apr. 26.
If only Wall Street shared his optimism.