Sirius plans to buy XM in $4.6 billion stock deal
Tuesday, February 20th, 2007

Sirius Satellite Radio plans to buy larger US rival XM for $4.6 billion in stock to bring entertainers such as Oprah Winfrey and shock-jock Howard Stern under one roof, but a top regulator said the deal would face a tough time winning approval. Under the agreement announced by the two companies on Monday, XM shareholders would receive 4.6 Sirius shares for each XM share held, or a 21.7 percent premium to XM’s closing share price of $13.98 on Friday. The deal would create a company with about $1.5 billion in 2006 revenue and an enterprise value of $13 billion, including $1.6 billion in net debt.

“This combination is the next logical step in the evolution of audio entertainment,” Sirius Chief Executive Mel Karmazin, a veteran media executive who will lead the new company, said in a statement. He said it would create “unprecedented choice for consumers.”

But the deal will likely face tough regulatory scrutiny and objections from terrestrial radio companies. US Federal Communications Commission Chairman Kevin Martin said the agency would review the deal but “the hurdle here, however, would be high as the commission originally prohibited one company from holding the only two satellite radio licenses.” Martin said the companies would have “to demonstrate that consumers would clearly be better off with both more choice and affordable prices.”

Karmazin and XM Chairman Gary Parsons told Reuters in a phone interview that they hope to meet with the FCC “shortly.” XM and Sirius say they should be allowed to combine as they compete with every audio device that consumers use - from typical car radios to digital music players. As one company, they said they can offer improved services at flexible prices.

“We are confident we will get this through the regulatory arena by the end of this year,” Parsons said. “Over a decade ago when the first satellite licences first came out, there were no iPods, there was no HD radio, there were no streaming music on cell phones.” Parsons said the merger agreement carries a break-up fee of $175 million.

“I think it’s a close call, but more likely than not I think the Justice Department and the FCC will approve it,” said Blair Levin, an analyst at Stifel Nicolaus & Co. and a former FCC chief of staff during the Clinton administration. The National Association of Broadcasters, which represents local broadcast radio stations, criticized the tie-up because it would concentrate the licenses into one company. ”Now, with their stock prices at rock bottom and their business model in disarray because of profligate spending practices, they seek a government bailout to avoid competing in the marketplace,” said NAB spokesman Dennis Wharton.

Karmazin and Parsons said they planned to continue to support radio devices offered by both companies while developing a new product that would work on both satellite radio services. While the companies called the deal a “merger of equals,” Sirius would own about 53 percent of the shares of the combined entity and XM would own about 47 percent under terms of the deal and based on the companies’ outstanding shares in the latest filings.

Parsons will be chairman of the merged company, but Karmazin will remain CEO - a sign analysts and shareholders typically use when determining which company gets the upper hand in a “merger of equals.” The two companies said they would work together to determine the combined company’s name and headquarters. XM CEO Hugh Panero would continue in his current role until the merger closes.

(Source: Reuters)