Satellite radio rivals agree to a merger

Regulatory hurdles remain before XM, Sirius can fuse

XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. have agreed to merge, the two companies said Monday. The deal would consolidate the only two companies in the emerging business of subscription-only satellite radio, and is sure to face tough scrutiny from federal regulators. Investors and analysts have been speculating about a deal for months

The two companies said in a statement that Mel Karmazin, the CEO of Sirius, would become chief executive of the new company while Gary Parsons, the chairman of XM, would remain in that role. XM's CEO Hugh Panero will remain to oversee closing the of the deal, they said.

The deal would face significant regulatory hurdles in Washington, including a Federal Communications Commission rule that clearly states that one satellite radio provider cannot buy the other one. However, that rule could be waived.

A combination would also have to meet antitrust approval from the Department of Justice. The companies are expected to argue that they compete not only with each other but also with a growing base of digital audio sources such as iPods, mobile phones, and non-satellite digital radio.

XM and Sirius have both posted significant financial losses as they built up their programming lineups and recruited subscribers. Both stocks declined more than 40 percent last year on concerns about their continued growth in subscribers and softness in the retail market, but investors have held out hopes that a merger could bring costs down significantly.

Shareholders of XM and Sirius would each own approximately 50 percent of the combined company. XM shareholders would receive 4.6 shares of Sirius stock for each share of XM they own.

That would value XM shares at $17.02 each, based on Friday's closing prices, representing a premium of 22 percent from XM's closing value of $13.98 Friday. Markets were closed Monday for the Presidents' Day holiday.

The companies didn't say what the new company would be called, though they described it as a merger of equals. The new company's board will have 12 members, including Parsons, Karmazin, four independent directors named by each company, and one representative each from General Motors Corp. and Honda Motor Co.

News of a possible merger was reported earlier Monday by the New York Post.

On Friday, a Bear Stearns analyst said in a research note that a merger would have a good chance of overcoming regulatory obstacles.

Other analysts remain less sure. Sanford C. Bernstein analyst Craig Moffett said he gives the deal a "50-50" chance of passing regulatory muster.

Moffett said the deal could have a particularly tough time getting through the FCC, and is likely to opposed by the National Association of Broadcasters, a lobbying group that includes radio broadcasters. Moffett said it was "anyone's guess" as to whether the FCC would change its rule barring a consolidation of the two satellite radio companies.