Markets & Finance

XM-Sirius: Is Merger Approval 'Imminent'?


Government approval of the deal could come by next week, one analyst says. The news sent shares of both companies into orbit Friday

The stocks of XM Satellite Radio (XMSR) and Sirius (SIRI) surged Nov. 30 as an analyst, citing "contacts in DC" said the U.S. Department of Justice was likely to approve the controversial merger of the two satellite radio companies very soon.

Bear Stearns (BSC) analyst Robert Peck wrote a "DOJ decision is imminent," arriving as soon as Nov. 30 or Dec. 3.

The federal government has been scrutinizing the deal for months. It must decide whether to challenge the merger in court on antitrust grounds.

Peck said he believed junior staff at the DOJ were opposed to the merger, buying arguments that the merger of the two only satellite radio firms would reduce competition too much.

Those supporting the merger say the combined XM-Sirius would still face significant competition, especially from traditional radio stations and from new technology like Internet radio or Apple's (AAPL) iPod device.

"While the final outcome remains uncertain," Peck said he thinks it likely top DOJ officials will decide to not block the deal. Even with DOJ approval, the merger between XM and Sirius will also need the OK of the Federal Communications Commission, or FCC. Peck expects that decision to arrive at year end.

Uncertainty over the XM and Sirius deal has been a black cloud hanging over the companies' stocks.

Earlier in November, a Deutsche Bank (DB) analyst, James Dix, warned that merger approval is a "50-50 proposition." A public announcement is unlikely in November, he wrote Nov. 19. In fact, a decision was as likely to wait until 2008 as to happen in December, he said.

XM and Sirius announced their "merger of equals" in February. Each XM share would be exchanged for 4.6 Sirius shares.

Competing head to head, each firm has its advantages. XM has more subscribers, with more than 9 million listeners expected by the end of the year according to Standard & Poor's equity analyst Tuna Amobi. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Cos.) But it's growing slower than Sirius which is expected to add 2.4 million customers in 2007, for a total of more than 8 million. Both are expected to win more customers as satellite radios are installed in new cars, but here XM has made deals with more automakers, analysts say.

Both companies are unprofitable, posting losses quarter after quarter. With a merger, they could reduce expenses for marketing, acquiring new subscribers and programming, says Morningstar (MORN) analyst Michael Corty.

"Although a merger would benefit both companies, ultimately we don't think the deal will be allowed by the U.S. government," Corty wrote. The government won't "allow a scenario in which consumers have only one option for satellite radio service."

The market has mostly disagreed. According to an analysis of stock price moves by Bear Stearns' Peck, investors expectations for a successful merger had been falling over the last month, but still remained at a probability of about 65%.

With Peck's report, that probability rose rapidly. By late afternoon on Nov. 30, XM's stock was up 13%, to about $13.30 per share. Sirius shares jumped 7.6% to $3.79 per share.

If the DOJ decides to not block the merger, XM shares could hit $20 and Sirius shares could reach $4.50, Peck says.

However, if a decision fails to arrive soon or if the DoJ decides to block the merger in court, expect the prices of both stocks to rapidly collapse.

Steverman is a reporter for BusinessWeek's Investing channel.

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