Mixed Signals on Radio Deal

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The proposed merger of satellite-radio giants XM Satellite Radio and Sirius Satellite Radio continues to wind through the regulatory approval process, but one analyst who follows both stocks said the chances of the merger passing muster has dropped dramatically in the past few weeks.

Sirius and XM Satellite proposed their $13.6 billion merger in February.

The new company would be led by former CBS chairman and now Sirius CEO Mel Karmazin as its CEO and XM chairman Gary Parsons as chairman. Current XM CEO Hugh Panero would leave once the deal is closed.

The deal would create a single satellite-radio powerhouse with an estimated 14 million subscribers and deals to put receivers into the vehicles of most major automakers.

The two companies still hope to close the deal before the end of the year.

Banc of America Securities broadcast analyst Jonathan Jacoby, in a research note last week, said the momentum for the merger appears to be swinging away from approval.

“Our D.C. contacts believe that XM and Sirius have lost momentum in their attempt to receive regulatory approval for their merger — we now believe that the chance of a deal getting through has fallen to 30% or less,” Jacoby wrote. He added that the catalyst for the shift appears to be recent reply comments filed with the FCC concerning the notice of proposed rulemaking that would repeal the commission's prohibition on one company owning both satellite digital audio radio service (SDARS) licenses. Both XM and Sirius have said that the industry has changed significantly since the SDARS rule was made in 1997, and that two separate licenses are no longer needed to preserve competition. Sirius and XM have said that they compete not just against each other, but against the entire radio industry.

According to Jacoby's report, XM and Sirius made weak arguments in their filings, essentially stating that the FCC retains the flexibility to revisit the rule and can and should repeal or modify its decade-old statement and approve the pending merger. In his report, Jacoby said simply requesting that the rule be thrown out or altered “lacked the substance the FCC likely will require.”

Opponents of the merger, such as the National Association of Broadcasters, put forth stronger arguments, Jacoby wrote, filing a strong analysis of the key administrative law issue that prohibits the two license holders from merging.

The gist of the NAB argument is that the FCC can't waive a rule if the ultimate result is the destruction of that rule, Jacoby wrote. The “commission would have to explain why such an abrupt and unprecedented departure from its long-standing policy of promoting spectrum competition,” the NAB said in its reply.

But a stickier argument may be that if the merger were to pass muster, it would be impossible to justify any limitations at all on broadcast-radio ownership.

“The problem for the FCC is that they are in for a huge court battle on radio ownership if they simply waive the rule — the risk is that the FCC will lose again at the courts on ownership issues,” Jacoby wrote in his report.

This all comes on the heels of a joint XM-Sirius statement showing that former FCC chairman Mark Fowler is in favor of the deal.

In a press release, XM and Sirius reprinted an op-ed piece Fowler wrote for the New York Sun, where he stated that if “the two satellite radio companies, each only several years old, need to combine to be more effective competitors in an audio-entertainment marketplace teeming with technological change and innovation, the government should not stand in the way.”

Fowler served as FCC chairman during the Reagan Administration.