Tough limits on XM-Sirius possible

Having waited almost 400 days for their Department of Justice approval, XM and Sirius satellite radio still have to curb their merger enthusiasm until the FCC delivers its decision.
One investment bank senior analyst who has tracked the two broadcasters for years, while welcoming the Department of Justice (DoJ) decision to permit the merger to proceed, thinks tough limitations might now emerge from the Federal Communications Commission (FCC).

“We expect the FCC to give its decision on the merger within the next couple of weeks,” says Alden Mahabir of Utendahl. “Given the track record of the FCC, we are hard pressed to believe it will block the merger after it received approval by the DOJ. That said, it is possible that the FCC could impose conditions on the combined entity, such as a-la-carte pricing (already proposed by the companies), price freezes, and/or giving up some of its spectrum. Given the DOJ has said it sees little reduction in competition from a merger, we think it is unlikely any condition put forth by the FCC will be materially adverse to the companies.”

Utendahl says impressive synergy savings are expected to flow from the merger, of about $3.7bn. “Although our cost synergies appear vast, we believe they are conservative relative to other analysts. Separately, we think it will take some time before the combined company realizes some of these synergies given the long-term agreements with auto OEMs and the need to operate both satellite systems in the near-term. Although we haven't incorporated any pricing assumptions in our analysis, we believe the a-la-carte pricing scheme that was proposed by the companies could be close to neutral, as lower revenue per sub may be offset by increased demand.”

Moreover, the approval has come at just the right time. Mahabir explains why: “Although both companies are increasing their penetration rates among their respective auto OEM partners, overall US car production and sales continue to decline. Separately, aftermarket/retail sales appear to be continuing [their] slump. As a result, we trimmed our industry forecast to roughly 20.7 million YE 2008 subs, down from 21.0 million. Our industry revision assumes a more significant cut for Sirius than XM, having Sirius end 2008 with 10.16 million subs (prior 10.47 million), while XM has 10.51 million (prior 10.53 million).”

Either way, this still means that the merged pair will have progressed to almost 21m overall subscribers by the end of this year – and the first of them (XM) only launched on September 25 2001. Once the FCC issues its decision – and terms – then the real work starts.