More Static for Sirius-XM Deal

Sirius Satellite Radio (SIRI) Chief Executive Mel Karmazin is willing to play ball with the government on possible conditions placed on his planned merger with XM Satellite Radio (XMSR). He has said he'll hold prices steady, for example, to allay concerns the deal would hurt consumers in the pocketbook.

But Karmazin may cry foul over a slew of other restrictions that the Federal Communications Commission is under growing pressure to impose before it gives a green light to the proposed combination.

Costly Wait?
Legislators want the FCC to force XM and Sirius to allow their satellite radio service on all manner of consumer electronics -- not just the devices made by manufacturers that have exclusive licensing agreements. The upshot would be devices that carry satellite radio alongside HD radio, Internet stations, and other competing sources of music. FCC officials are also being lobbied to require XM and Sirius to give up some of their channels for use by public radio or minority-owned broadcasters.

The tougher the restrictions imposed by the government, the harder it will be for the companies to eke out the cost savings and revenue increases of as much as $6 billion that analysts estimate the deal will provide. "The conditions could limit the synergies," says Standard & Poor's analyst Tuna Amobi.

Worse, the longer XM and Sirius are forced to wait for a government green light, the less leeway they have in whether to accept FCC conditions. Already, the planned transaction has been up in the air for almost 15 months, one of the longest limbo periods on record, according to Thomson Reuters (TRI). The deal was supposed to close by the end of 2007 but may not receive approval till June, if not later, says Stifel Nicolaus & Co. analyst Blair Levin, a former FCC chief of staff. Proponents had hoped the deal would come up for discussion at a May 14 FCC meeting, but that's looking increasingly unlikely.

Ripples from Auto Sales Slump
Meantime, the loss-making companies are having to put off key operational decisions at a time when industry prospects dim and merger-related costs delay breakeven. Sirius cut sales and marketing in the fourth& quarter, the most recent period for which figures are available, to $53.1 million, from $73.1 million a year earlier. XM's brand recognition has declined this year compared with late 2007, according to surveys conducted by consultancies Edison Media Research and Arbitron. "They've not done much advertising" says Edison President and Co-founder Larry Rosin. "They are in a holding pattern while they are waiting for their merger to be approved."

XM and Sirius get most of their new subscribers through sales of autos that have satellite radios preinstalled. But sales for such key partners as General Motors (GM) and Ford Motor (F) are slumping. "If there's no merger, it's going to be a lot more difficult for either of them to survive on their own, especially XM," says Amobi at Standard & Poor's, which like BusinessWeek.com, is owned by The McGraw-Hill Companies (MHP). Amobi has a "strong sell" on XM in part because of its reliance on auto sales.

Neither Sirius nor XM responded to requests for comment. An FCC representative didn't respond to a request for comment on possible conditions.

A challenging industry environment may not keep the FCC from placing restrictions aimed at ensuring the transaction doesn't result in higher prices or reduced competition. The Justice Dept. has already cleared the XM-Sirius combination on antitrust grounds. On May 1, John Dingell, chairman of House Committee on Energy & Commerce, and Edward Markey, chairman of the Subcommittee on Telecommunications & the Internet, jointly asked FCC Chairman Kevin Martin to require the merged company to loosen restrictions on which devices can pick up satellite radio service -- a condition likely to be met with dismay at Sirius and XM. "Clearly, you don't want your competitors' signal carried over the same device," says Jessica Zufolo, senior policy director for telecommunications, media, and technology at investment firm Medley Global Advisors.

U.S. Electronics, which lost a deal to manufacture equipment for Sirius several years ago, is a proponent of the requirement, saying that without open access, Sirius-XM could increase prices by jacking up licensing fees to manufacturers. "Competition and consumers would be better served if there's an open device requirement," says Kathy Wallman, outside counsel for U.S. Electronics.

Deciding on Diversity Goals
Interest groups and some Minnesota politicians demand that Sirius-XM give up one-fifth of its programming capacity for use by public radio or minority-owned broadcasters. "Carving out 20% of satellite channels for the people is an appropriate amount," says Jeff Nelson, a spokesman for American Public Media Group, a producer of public radio programming. Entities such as Public Knowledge, a D.C.-based advocacy group, have been pushing for at least 5% of the merged company's bandwidth to be allocated to nonprofit and educational programming. The final requirement will probably fall somewhere between those two percentages, says Paul Gallant, a senior vice-president at industry consulting firm Stanford Washington Research Group.

One of the most vocal proponents of conditions is minority-owned private equity firm Georgetown Partners, which has met with the FCC 23 times since the beginning of the year. Georgetown, run by millionaire Chester Davenport, wants to lease 20% of the combined company's capacity to stream family-friendly programming. "It serves public interest because it assures diversity of programming and diversity of ownership," says Georgetown spokesman Robert Siegfried. "It solves, we believe, an issue the FCC has now with the merger" related to minority ownership and diversity of programming."

Giving up that many channels would be a high price to pay for a government go-ahead. "Some subscribers will lose the programming they most value," says Gallant. Despite some overlap in programming, XM and Sirius "would have to make some hard choices on what channels to drop."

But XM and Sirius don't have the luxury of walking away from the deal, even in the face of stiff conditions. Notes Gallant: "This merger is still a very strong improvement to the companies' business models at a time when some are questioning whether the two separate companies can survive."