NEW YORK – XM Satellite Radio Holdings Inc. (XMSR) and Sirius Satellite Radio Inc. (SIRI), rivals in the fledgling satellite radio industry, have agreed to combine in a deal that investors hope will result in lower costs, assuming it overcomes significant regulatory hurdles.
The obstacles include a Federal Communications Commission provision that specifically forbids the two companies to combine.
Analysts have noted that the FCC could change the rule, but in a statement late Monday FCC Chairman Kevin Martin said that the "hurdle" would be "high" to prove that the deal would be in the public interest.
"The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices," Martin said.
The companies billed the deal announced Monday as a merger of equals, with shareholders of both companies owning approximately 50 percent of the combined entity. However, Sirius will be giving $4.57 billion of its stock to XM shareholders, a substantial premium to the value of their shares.
The merger will 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 traditional radio and a growing base of digital audio sources such as iPods, mobile phones and non-satellite digital radio.
The XM shareholders will receive 4.6 shares of Sirius stock for every share they own, valuing them at $17.02 each based on Friday's closing price for Sirius shares. That gives XM shareholders a premium of 22 percent to the $13.98 closing value of their stock on Friday. Markets were closed Monday for the Presidents' Day holiday.
Investors and analysts have been speculating about a deal for months, and are hoping that the cost savings that would result would make up for softening retail demand for satellite radio units. Both services offer dozens of channels of talk and commercial-free music for monthly fees of about $13.
XM radio receivers can't receive signals from Sirius, and vice versa. But Karmazin and Parsons said in an interview that the companies are working on developing a receiver that could receive both signals.
In the meantime, they said, assuming the deal goes through, the companies would make other arrangements to bring programming that's currently exclusive to one provider to listeners of the other, such as getting Major League Baseball games — currently only available on XM — to Sirius listeners.
"We will be taking every effort to find the best possible programming combination," Parsons said.
It's too early to say what the deal will mean for subscription prices. The merger could bring down the cost of providing service, but at the same time give the company more pricing power as the only U.S. satellite radio provider.
Karmazin declined to comment specifically about how much the companies hoped to save by the merger, but he said he expected the deal to clear regulatory approval and close within six to nine months. "We understand that there's a lot of work to be done," Karmazin said.
Neither XM nor Sirius have turned a profit yet as they spent heavily to build up their programming lineups and subscriber bases, including a five-year, $500 million contract that Sirius made with the shock jock Howard Stern. Both stocks declined more than 40 percent last year on concerns about their continued growth in subscribers, but investors have held out hope of a merger.
The combined company would have had about $1.5 billion in revenues in 2006 and about 14 million subscribers, they said. The companies said they would work together to decide on a new name and also to determine where it would be based. XM is based in Washington, while Sirius is based in New York.
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. (GM) 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 said it was "anyone's guess" as to whether the FCC would change its rule barring a consolidation of the two satellite radio companies.
A group representing radio companies, the National Association of Broadcasters, put out a statement Monday urging federal regulators to block the satellite radio deal.