Sirius and XM Get the Justice Go-Ahead

The Justice Dept. has cleared the satellite radio services' merger, but opponents are likely to appeal to the FCC, which has yet to weigh in

by Catherine Holahan and Arik Hesseldahl

The music is playing, finally, for Sirius (SIRI) and XM (XMSR). On Mar. 24, 13 months after America's only two satellite radio providers announced they were hooking up, the U.S. Justice Dept. green-lighted the deal, declaring that the $13 billion combination would not create a harmful monopoly. "We determined after a very thorough and comprehensive investigation that we should not challenge the transaction and have closed our investigation," said Assistant Attorney General Thomas Barnett in a conference call announcing the decision. "The evidence did not support a relevant market limited to just the two satellite providers."

Justice's decision hinged on a broad view of that market. Rather than consider satellite radio as a sector unto itself, with only two players, Justice officials saw the "relevant market" as the audio-entertainment industry. Under that definition, Sirius and XM have multiple competitors, including terrestrial radio, Internet music stations, online streaming music sites, download services such as Apple's (AAPL) iTunes, and even Web-connected mobile devices of the future. "The likely evolution of technology…made it even more unlikely that the transaction would harm consumers," said the Justice Dept. in a statement.

Sirius and XM officials took the news with quiet optimism. The companies declined to comment outside of a staid official statement confirming the decision and noting that they still have one more regulatory hurdle to clear: the Federal Communications Commission. Although the FCC traditionally does not block mergers after Justice Dept. approval, neither company wanted to celebrate prematurely. "The charter for the spectrum they were awarded says they do need to be owned by separate entities that must compete against each other," says David Niederman, an analyst at Pacific Crest Securities. Despite this caution, however, Niederman believes the deal "probably will get passed."

Investors apparently think so, too: Shares of both companies spiked after the announcement. XM's stock closed the day up 15.5%, rising to $13.79. Sirius saw its shares jump 20% before settling down to $3.15, an increase from $3 earlier in the day.

Making Headway on the Road

If the merger goes through, Sirius and XM will have a lot to celebrate. Both companies have hemorrhaged money in their bid to compete for the marquee talent needed to encourage customers to invest $70 to $200 in a satellite radio player and an additional $8 to $13 a month in subscription fees. Sirius reported operational losses of $327.4 million for 2007, which was an improvement over its $513.1 million in operational losses for 2006. XM reported 2007 losses of $682 million, a roughly $37 million improvement from the prior year. April Horace, an analyst at Denver-based Janco Partners, anticipates that the combined companies could eventually save $4 billion in operating expenses over six years. XM had 9 million subscribers as of the end of last year, up 18% from the previous year, vs. 8.3 million for Sirius, up 38%.