WASHINGTON — XM Satellite Radio and Sirius Satellite Radio managers said that even after their proposed merger, satellite radio will remain a relatively small player in the broader audio-entertainment market but will generate far stronger financial results and ensure the long-term survival of a satellite radio option.
In a conference call Feb. 20, the top executives with XM and Sirius pointed out that that the growth of high-definition terrestrial radio, Internet radio, satellite television- and cable-provided radio programming and the proliferation of iPods and cell phones with radio or audio recording features guarantee robust competition even after a merger. It is this argument that the companies are taking to the U.S. Federal Communications Commission (FCC) and the U.S. Department of Justice.
Sirius of New York and XM of Washington announced their planned merger Feb. 19. Wall Street, which had been encouraging the deal for months, reacted positively, with both stocks rising sharply on the news.
U.S. regulators’ reaction is harder to gauge. In a statement issued Feb. 20, FCC Chairman Kevin Martin said the deal faces a high hurdle for approval due to regulations that bar one company from holding the only two U.S. satellite radio licenses. “The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices,” he said.
In the conference call, XM and Sirius said they had made informal inquiries to regulators and political authorities and determined that the merger, which could close by the end of the year, has a more than 50-50 chance of success. Investment bank Bear Stearns said in a Feb. 21 research note that there is reason to believe the FCC will accept the deal based on the changed audio-entertainment landscape in the United States in the past decade.
But William Kidd, an analyst with brokerage Wedbush Morgan Securities, issued a note Feb. 20 putting the odds of regulatory approval at below 50 percent.
Sirius Chief Executive Mel Karmazin, using one example of satellite radio’s relatively small place in the U.S. audio landscape, said the two satellite companies generated a combined $70 million in advertising revenue in 2006, compared to an estimated $20 billion in advertising revenue for AM/FM radio broadcasters that year.
XM and Sirius have a combined 14 million subscribers and reported combined revenues of $1.5 billion in 2006. The two companies, Karmazin said, have accumulated $6 billion in combined losses. Karmazin said it has been two years since either company has raised its subscription rates, a measure of the competitive pressure from free AM/FM and other outlets that will put a lid on the merged company’s ability to use its new status to increase prices.
A merger, Karmazin said, would generate more cost synergies than he has ever seen in any merger — from the terrestrial repeater network that permits satellite radio signals to penetrate where line-of-sight satellite access is not available, to legal costs and the cost of original content. Karmazin said the figures used on Wall Street of $3 billion to $7 billion in synergies is probably about right, but that the companies themselves have been barred by U.S. anti-trust law from comparing costs in any detail. He cited a midpoint estimate of $5 billion to $6 billion, and said this figure is more than the current market capitalization of either XM or Sirius.
XM’s satellites are in geostationary orbit over the equator. Sirius uses a different orbital architecture , with its satellites in highly elliptical orbits whose apogee is reached during passes over North America to provide a better look angle between the satellite and its users. A merger ultimately would lead to selecting one or the other orbital architecture, but this will not occur for many years, XM Chairman Gary Parsons said.
“We each have satellites with 15 or more years of lifetime and millions and millions of subscribers dependent on that satellite constellation,” Parsons said in the conference call. “It is simply not realistic, or practical, to look at the elimination of a platform.”
XM launched its fourth satellite in late 2006 and this year is proceeding with the construction of a ground spare satellite. This work will not be affected by the proposed merger, Parsons said.
Parsons added that “certain of our satellites can go across both sets of [radio] spectrum.” Each company currently has access to 12.5 megahertz of radio spectrum over the United States. The merged entity presumably would have access to 25 megahertz of spectrum.
Similarly, Karmazin said Sirius is going ahead with the planned launch of a fifth satellite in 2008, a $260 million investment. Sirius-5, under construction at Space Systems/Loral of Palo Alto, Calif., marks a departure for Sirius in that it will be in geostationary orbit and will feature a 9-meter-diameter antenna to provide services, perhaps including video programming, to mobile devices. Sirius also has a ground spare satellite already built that is intended for the company’s elliptical orbit.
More immediately, a merger would permit the two competitors to accelerate work on an interoperable chipset that would be capable of receiving signals from XM and Sirius satellites.
The name and location of the merged company — assuming the deal is approved — have yet to be determined.
