Merger Would End Satellite Radio’s Rivalry

February 20, 2007

Merger Would End Satellite Radio’s Rivalry

By RICHARD SIKLOS and ANDREW ROSS SORKIN

The nation’s two satellite radio services, Sirius and XM, announced plans yesterday to merge, a move that would end their costly competition for radio personalities and subscribers but that is also sure to raise antitrust issues.

The two companies, which report close to 14 million subscribers, hoped to revolutionize the radio industry with a bevy of niche channels offering everything from fishing tips to salsa music, and media personalities like Howard Stern and Oprah Winfrey, with few commercials. But neither has yet turned an annual profit and both have had billions in losses.

While there had been speculation of a merger, neither side had engaged in serious negotiations until December, when both companies determined it was in their best interests to complete a deal while the Bush administration was in power, people in the negotiations said.

The companies said yesterday that their $13 billion merger — code-named Project Big Sky by XM — would give consumers a broader range of programming, while eliminating overlapping stations that focus on genres of music. At the same time, they said, they could cut duplicated costs in sales and marketing.

A merger would require antitrust approval from the Justice Department and would have to be considered in the public interest by the Federal Communications Commission.

Under their operating licenses, XM and Sirius were prohibited from ever owning each other’s license. The commission could waive that rule. But critics pointed to its rejection of the merger of the satellite television broadcasters EchoStar and DirecTV four years ago.

Questioned last month about a possible Sirius-XM merger, the F.C.C. chairman, Kevin J. Martin, initially appeared to be skeptical, but later said that if such a deal were proposed, the agency would consider it.

In a statement yesterday, Mr. Martin acknowledged that the F.C.C. rule could complicate a merger but said the commission would evaluate the proposal. “The hurdle here, however, would be high,” he said.

The proposed merger, first reported yesterday by The New York Post, promises to be a test of whether regulators will see a combination of XM and Sirius as a monopoly of satellite radio communications or whether they will consider other audio entertainment, like iPods, Internet radio and HD radio, to be competitors.

“If the only competition to XM is Sirius, then you don’t let the deal through,” said Blair Levin, managing director of Stifel Nicolaus & Company and a former F.C.C. chief of staff. But Mr. Blair said he expected the F.C.C. to approve the merger.

“It’s my view that in looking at this picture, the Justice Department is going to conclude that the market is contestable, that there’s various ways these services compete and they’ll allow this merger.”

Both Sirius and XM have been rapidly adding customers since they began selling the concept of subscription-based radio available coast to coast about six years ago. XM ended 2006 with nearly eight million customers but Sirius increased its subscriber base by 80 percent last year, to about six million, after it signed Mr. Stern in a $725 million cash and stock deal.

Still, both companies had expected faster growth, and the real number of subscribers may be less than appears at first glance. Many receive the service free for a trial period when buying a new car or truck.

The two services have some $6 billion in accumulated losses. Both companies’ share prices have slumped recently as investors cooled on the companies’ prospects for generating profits, given the heavy costs of acquiring programming talent like Mr. Stern and the radio rights to the National Football League and Major League Baseball.

The companies’ services are, for the moment, not compatible. If the merger were approved, officials said yesterday, they would provide subscribers with technology that would allow them access to both services.

Each sells subscriptions for $12.95 a month. The cost of the combined service is yet to be determined.

Pricing the service is only one of many commercial and operational challenges the merger would face. For one thing, XM has prided itself on being advertising-free while Sirius sells ads on its talk radio fare, including Mr. Stern’s shows.

Craig E. Moffett, an analyst with Sanford C. Bernstein & Company, said it was not clear that Mr. Stern, Ms. Winfrey and some of the other major draws on the channels would be readily accessible to the merged companies’ wider audience.

Mel Karmazin, the longtime broadcasting executive who has been chief executive of Sirius for the past two years, said he had tried to reach Mr. Stern, who is on vacation, but had not yet done so, and a company spokesman said Sirius does not discuss its contracts.

The new company’s name and where it would be based — Sirius is in New York and XM in Washington — have not yet been determined. Mr. Karmazin would continue as chief executive while Gary Parsons, XM’s chairman, would remain as chairman of the merged company.

In an interview yesterday, Mr. Karmazin and Mr. Parsons said they believed they could prove the combination would be in the public interest.

Mr. Parsons said that unlike EchoStar and DirecTV, whose only rival was cable television, the satellite radio companies have a very small audience compared with the ways people get music, information and entertainment in audio formats, including iPods and the Internet. “The only thing that you could even think of as similar between those companies and us is that they both use satellites,” Mr. Karmazin said.

But critics are lining up. The National Association of Broadcasters, a trade group that represents broadcast radio and television stations, issued a statement within hours of the XM-Sirius announcement.

“In coming weeks, policy makers will have to weigh whether an industry that makes Howard Stern its poster child should be rewarded with a monopoly,” it said.

XM and Sirius had been in a mating dance for years, with Mr. Karmazin and Mr. Parsons flirting both publicly and privately. According to people involved in the talks, they began serious talks just before Christmas.

Anxious about Mr. Karmazin and Mr. Parsons being spotted together, the two sides decided to meet in an inconspicuous spot: the Upper East Side apartment of one of Mr. Parsons’s bankers, Dennis S. Hersch, a former lawyer who joined JPMorgan Chase two years ago.

Mr. Karmazin met with Mr. Parsons for several hours in Mr. Hersch’s living room one morning in late December, these people said. They sat on sofas flanked by their advisers, James B. Lee and Mr. Hersch of JPMorgan Chase, which represented XM, and Paul Taubman of Morgan Stanley, which worked for Sirius. The men decided to pursue a deal.

An army of merger and antitrust lawyers for both sides worked several marathon weeks of conference calls and trips to Washington to gauge the political climate for the transaction before opining that the deal should pass regulatory muster. Simpson Thacher & Bartlett and Wiley Rein are representing Sirius; XM is being advised by Skadden, Arps, Slate, Meagher & Flom; Jones Day; and Latham & Watkins.

About a month later, the two sides reconvened, this time at Mr. Karmazin’s apartment in the Trump International Hotel and Tower just off Columbus Circle overlooking Central Park. It was a daylong negotiation. But both sides were far apart on price: Mr. Karmazin didn’t want to pay much of a premium and Mr. Parsons was seeking an even higher one than he got yesterday. Mr. Parsons and his advisers left the apartment thinking the talks might collapse.

About a week later, after talking to their boards, the two sides were coaxed back together, both giving a little on price. Two weeks ago, Mr. Parsons returned to Mr. Karmazin’s apartment. This time, the men reached a deal and shook hands on it.

Jeremy W. Peters contributed reporting.