Satellite radio rivals set merger

Sirius, XM agree to a $13b deal

Satellite radio rivals XM and Sirius yesterday agreed to a $13 billion dollar merger that's likely to face tough opposition from antitrust regulators and could be disruptive to millions of subscribers who may have to buy new radios and accept fewer listening options.

Capping months of speculation, Sirius Satellite Radio Inc. said it plans to buy its bigger and only competitor, XM Satellite Radio Holdings Inc. in a stock deal. The new company would have annual revenue of about $1.5 billion and about 14 million subscribers.

The companies were built on the idea that consumers would pay a premium for high-quality radio programming. Satellite radio listeners must buy a special receiver, plus pay a monthly fee.

Combining the two companies would create a monopoly overnight. "There's a choice now of satellite radio services, and there will not be a choice after the merger," said Josh Bernoff, principal analyst at Forrester Research in Cambridge.

Industry and legal analysts said the deal will have a tough time winning approval from the Federal Communications Commission and antitrust regulators at the US Department of Justice. "This is likely to undergo six months of regulatory wrangling," Bernoff said.

Antitrust lawyer Steve Axinn, senior partner at the New York firm Axinn, Veltrop & Harkrider, was more blunt. "I would predict a stony path for this merger, both at the FCC and the Justice Department," he said. "I would not predict this merger going through."

FCC chairman Kevin J. Martin in a prepared statement said the transaction faces high hurdles, because the commission "originally prohibited one company from holding the only two satellite radio licenses. The companies would need to demonstrate that consumers would clearly be better off, with both more choice and affordable prices."

US Representative Ed Markey of Malden, who is chairman of the House Telecommunications Subcommittee, issued a statement warning he would take a hard look at the deal. "This is a merger proposal that merits the utmost scrutiny by federal policy makers and regulators," Markey said.

XM spokesman Nathaniel Brown said the satellite radio companies don't just compete against each other. "We are in a very dynamic and robust digital audio market in which we are competing with free AM and FM radio, we're competing with HD radio, we're competing with iPods, we're competing with Internet radio, with cellphones," he said.

If regulators take the entire audio market into account, an XM-Sirius merger would not significantly reduce competition, Brown said. He argued that competition would be enhanced, because the merged company would be able to offer new services, including video and digital data streams.

Sirius did not return phone calls yesterday. Its chief executive, Mel Karmazin, would become CEO of the combined company. Gary Parsons, chairman of XM, would become chairman. A new name has yet to be determined.

Under the terms of the deal, Sirius will pay $17.02 for each XM share, a 22 percent premium over XM's closing price on Friday.

Sirius and XM charge subscribers about $13 a month. Subscribers purchase receivers that let them pick up dozens of channels of audio programming beamed from satellites. XM started broadcasting in 2001, Sirius in 2002.

Both companies have experienced sizable subscriber growth over the past year, partly due to their success in attracting exclusive high-profile programming deals. Sirius saw its subscriber total rise 80 percent, to 6 million subscribers, after it signed an exclusive $500 million contract with notorious terrestrial radio "shock jock" Howard Stern. XM countered by doing a deal with TV talk show host Oprah Winfrey. Its subscriptions rose nearly 30 percent last year, to 7.6 million listeners.

Still, both companies have consistently lost money, both reported slowing subscription growth during the fourth quarter of 2006, and shares of both have slumped over the past year.

Stuart Jackson, vice president at L.E.K. Consulting Inc., in Chicago, said a merger would allow the two struggling companies to cut costs and extend their reach by combining content, advertising sales, and customer recruitment efforts.

Josh Martin , a media and entertainment analyst for Yankee Group in Boston, said consumers could benefit.

He said the merged company would probably add channels and offer one-stop shopping to sports fans or jazz aficionados. And rates could eventually drop because celebrities like Stern wouldn't be able to command the same high salaries from a single company, he suggested.

"Prices will remain stable initially, and consumers will benefit from the increased programming they're going to get," Martin said.

Even so, customers would have to purchase new radios to take full advantage of the merged system. Despite an FCC requirement that satellite radios be capable of receiving both Sirius and XM broadcasts, the current generation of receivers lacks this ability.

The issue is moot if regulators block the deal. Bernoff noted that in 2002, the FCC barred a similar merger between the two major satellite television services, DirecTV and EchoStar Communications Corp., parent company of Dish Network. "The FCC and the Federal Trade Commission couldn't get past the fact that at the end of this there would only be one," Bernoff said.

Hiawatha Bray can be reached at bray@globe.com. Robert Weisman can be reached at weisman@globe.com