Sirius And XM To Merge

After months of speculation, satellite radio rivals Sirius and XM have agreed to a merger with the goals of offering greater variety to subscribers and reducing costs, which have kept both companies from profitability. Under the terms of the agreement, announced Monday, Sirius CEO Mel Karmazin will become CEO of the new combined entity, and XM chairman Gary Parsons will serve as its chairman. XM's CEO Hugh Panero is expected to step down after the merger is complete.

The new company, whose new name has yet to be announced, would have total assets worth about $13 billion and a shared debt of $1.6 billion. Combining XM's 7.6 million subscribers with Sirius' 6 million, the new company could have a total subscription base of well over 16 million by the end of 2007, if previous projections are accurate.

The companies' plan still faces significant regulatory "hurdles," according to FCC chairman Kevin Martin, who released a statement on Monday noting that "the companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices." Meanwhile, the National Association of Broadcasters, representing terrestrial radio stations that compete with satellite, issued a scathing comment which read in part: "NAB would be shocked if federal regulators permitted a merger of XM and Sirius... When the FCC authorized satellite radio, it specifically found that the public would be served best by two competitive nationwide systems. Now, with their stock prices at rock bottom and their business model in disarray because of profligate spending practices, they seek a government bail-out to avoid competing in the marketplace."

advertisement

advertisement

A merger may help cut costs at both companies that led to losses in 2006. One of the chief culprits is the high cost of acquiring new subscribers, which at one time stood well over $100 per new subscriber for both companies. In third-quarter results--the most recent available--Sirius' net loss was $162.9 million, down from $180.4 million in the third quarter of 2005. The company posted a second-quarter loss of $237.8 million and a first-quarter loss of $458.5 million, associated with high marketing costs surrounding Howard Stern's move to the company. For its part, XM's third-quarter loss was $83.8 million, down from $131.9 million in the same quarter last year. The company also posted a second-quarter loss of $229 million and a first-quarter loss of $149.2 million. Wall Street analysts forecast cost savings of $3 billion or more resulting from the merger.

The new company's stated goals also include more flexibility in their subscription terms by allowing consumers to choose which channels they want to receive in an "a la carte" system. Additionally, the partnership would aim to produce cheaper, more attractive radio sets that will help broaden the appeal of satellite radio. Sharing expertise could also help avoid regulatory troubles: in 2006, both companies faced close scrutiny and product delays because the Federal Communications Commission was concerned about unwanted electronic emissions from the radios. Engineers from the two companies would be able to pool valuable "lessons learned" in the merger.

One of the most important results, however, would be a vast increase in both players' installed base of satellite radio sets in new cars. Currently, XM has agreements with car manufacturers representing about 59% of the U.S. auto market, including General Motors, Honda, Hyundai, Nissan, Porsche, Subaru, Suzuki and Toyota, while Sirius has deals with most of the rest, including Ford and DaimlerChrysler.

As the rate of new subscription additions slowed over the last year, both companies pointed to their partnerships with automakers as a key future growth area. In an acknowledgement of the importance of these automaker partnerships, the new company's 12-member board of directors will include representatives from Honda and GM.

Although their partnership agreements blanket the auto market, actual penetration of new cars is rising slowly: in 2007 Sirius hopes to have sets installed in 28% of Ford cars, up from 17% in 2006; while XM sets will be installed in 1.8 million GM cars in 2007, or 40% of total production. What's more, these installed sets don't necessarily lead to new subscriptions after a free trial period: XM claims a 52% overall retention rate. Sirius doesn't discuss its retention numbers.

It's not clear how--or if--the merger will affect an ongoing lawsuit against XM brought by the Recording Industry Association of America, which alleges that XM's portable Pioneer Inno player allows consumers to engage in music piracy by recording up to a gigabyte of music from digital airplay. The RIAA lawsuit, seeking $150,000 for every song thus recorded, came on the heels of threats of similar legal action against Sirius Satellite over its S50 player. This conflict was resolved in March 2006 by a deal between Sirius and four leading recording companies, in which Sirius paid them an undisclosed sum for each S50 device sold. The terms of the Sirius settlement included a redesign of the device to certain RIAA specifications, reducing its recording capabilities--something XM has refused to do with the Pioneer Inno.

Finally, the departure of XM CEO Hugh Panero after the merger is complete may relieve some skepticism from investors who are angry about allegations of earlier wrongdoing. In May 2006, XM investors brought a lawsuit disputing the sale of a total of about $79 million of XM stock by CEO Hugh Panero and four other XM executives in 2005. Panero and the other executives are accused of issuing false forecasts of overall subscriptions and the average cost of new subscriber acquisition to inflate stock prices in the 6-month period before they sold their stock.

Next story loading loading..