Judging by the steady slide in satellite-radio stocks since the two companies announced their big tie-up three months ago, it seems investors are growing less confident that the proposed union of the two pay-radio shops will survive regulatory scrutiny.
XM and Sirius shares are both down 30% since the deal was announced in February. The shareholder anxiety has helped trim the value of the deal to $3.8 billion from as high as $5.5 billion in the early post-announcement euphoria.
Wall Street seems to be taking its cue from leading legal experts in Washington, D.C. They agree that the most formidable challenge to the merger will come from the Justice Department's antitrust review.
XM and Sirius will have to convince the agency that their biggest competition isn't each other, but other sources of news and entertainment -- like conventional and digital radio, iPods and mobile Internet devices, the experts say.
"Determination will likely turn on what the product market is," says an antitrust lawyer who is not directly involved with the case. "They will have to win on the market definition argument," says another Washington antitrust attorney who is following the case closely.
That's not to say that all the consumer implications have been solved, observers say. But so far, the Federal Communications Commission has shown a
willingness to consider a merger that by its own rules is a violation. When the radio spectrum was originally licensed to only two companies, the terms called for separate ownership that would foster competition. The FCC, though, has said those rules can be rewritten.
To help assuage the FCC, XM and Sirius will likely offer concessions such as price cuts or caps, and programming guarantees that would appear to benefit the consumer, experts say.
Those conditions don't carry much sway with antitrust enforcement types who are attempting to gauge the level of competition a satellite radio monopoly would face.
"I think the FCC will wave it through and let Justice take the heat," says one of the Beltway antitrust lawyers, who gives the deal a 70% chance of approval from the FCC, but less than a 50% chance of a favorable ruling from the DOJ.
If Justice takes a narrow market definition by looking only at competition within the satellite radio market, then the merger won't have a chance, says the attorney. Narrowly defined, it's clearly subscription radio going from a two-player market to one, he says.
But if the antitrust regulators look ahead two years, as they should, and consider what the market will be then, the deal has a decent chance of passing, says the other antitrust expert who believes the merger eventually will be approved.
Both men say the decision ultimately hinges on the agency's review of internal documents. If XM's documents show a lot of concerns about losing customers to Sirius and have little or no mention of losing customers to iPods or free radio, then it's easy to make a case for blocking the merger.
As far as a timeline, the experts expect the agencies will be getting to "the meat" of the review this summer, when they start a second request for information. Any action based on the review likely will come in late summer or early fall, the lawyer estimates.
It should prove to be a rather arduous road for the companies and regulators, and probably even bumpier for investors.