[cr-india] US - Merger Would End Satellite Radio’s Rivalry

[Tracey P. Lauriault]

I am not sure this is suitable for this list, if not please be sure to 
let me know. 
*********************

February 20, 2007
http://www.nytimes.com/2007/02/20/business/media/20radio.html?_r=1&th&emc=th&oref=slogin


  Merger Would End Satellite Radio’s Rivalry

By RICHARD SIKLOS 
<http://topics.nytimes.com/top/reference/timestopics/people/s/richard_siklos/index.html?inline=nyt-per> 
and ANDREW ROSS SORKIN 
<http://topics.nytimes.com/top/reference/timestopics/people/s/andrew_ross_sorkin/index.html?inline=nyt-per>

The nation’s two satellite radio services, Sirius 
<http://www.nytimes.com/mem/MWredirect.html?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=SIRI> 
and XM 
<http://www.nytimes.com/mem/MWredirect.html?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=XMSR>, 
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 
<http://topics.nytimes.com/top/reference/timestopics/people/s/howard_stern/index.html?inline=nyt-per> 
and Oprah Winfrey 
<http://topics.nytimes.com/top/reference/timestopics/people/w/oprah_winfrey/index.html?inline=nyt-per>, 
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 
<http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_communications_commission/index.html?inline=nyt-org>.

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 
<http://www.nytimes.com/mem/MWredirect.html?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=DISH> 
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 
<http://topics.nytimes.com/top/reference/timestopics/people/k/mel_karmazin/index.html?inline=nyt-per>, 
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 
<http://www.nytimes.com/mem/MWredirect.html?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=MS>, 
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.