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XM-Sirius Deal Still Crawling Along

Analysts say the Justice Department is to blame for what has been 13 months of waiting, but they believe a decision finally could be on the horizon.

XM Satellite Radio

(XMSR)

and

Sirius

(SIRI) - Get Sirius XM Holdings, Inc. Report

want regulatory clearance, and they want it now.

Analysts say the blame for what has been 13 months of waiting for approval or denial of the planned merger should fall more on the Justice Department than the Federal Communications Commission, although they believe a decision should come soon.

Since the merger agreement between XM and Sirius was announced more than a year ago, XM shares have tumbled more than 25% and Sirius stock has lost 30% as investors continue to wait for both government entities to weigh in. Many observers expect that the Justice Department will be first to move, although no one is sure what they'll eventually say.

"The Department of Justice absolutely has to take the first step," says UBS analyst Lucas Binder. "The FCC is waiting to see if the Justice Department construes the deal as anticompetitive. After that, the FCC could make a public policy announcement."

Barry Pupkin, a partner with Squire Sanders & Dempsey who practices routinely before the Federal Trade Commission and Justice, agrees that Justice would most likely be the first of the two government entities to make a determination.

"The DOJ focuses on competitive effects, which means raising prices and reducing choice," Pupkin says. "If they decide there is a competitive problem, the FCC doesn't even have to reach an issue of injury to public interest."

Pupkin says that under the clearance procedure put forth in the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the government has most likely made a second request for additional information from both Sirius and XM. That second inquiry, Pupkin says, usually includes requests for thousands of pages of documents, and quite often the government asks for depositions and interviews.

"Assuming that both Sirius and XM have provided everything the government has asked for, the government then has 30 days to review the information," Pupkin says. "Once 30 days have passed, the government has no ability to stop the transaction unless the parties agree that they will hold up the transaction voluntarily."

Mounting frustration boiled over last week during a Bear Stearns media conference, as Sirius CEO Mel Karmazin fumed over the delay and said he expected a ruling by the FCC and the Justice Department over the merger agreement by the end of this month.

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"Clearly, if there was a big problem with the merger it wouldn't take

the FCC and the Justice Department this long to figure it out," Karmazin said. "Either you believe we compete with a whole bunch of audio choices or you think there's a distinct market called satellite radio."

RBC Capital analyst David Bank agrees that the regulatory agencies should be relatively close to a resolution, and that general sentiment is consistent that an approval is imminent. "However, I wouldn't put timeframes on this deal," he warns. "It's difficult to call from the outside, and it's very dangerous to give specific days."

Karmazin has been adamant in his belief that the situation is not as complicated as it seems, and that the deal can close immediately after getting the green light from the FCC.

"At the very least, the FCC has to approve the transfer of licenses," says Adam Candeub, an associate assistant professor of law at Michigan State University College of Law. Candeub previously held the position of attorney-advisor for the FCC in its media bureau. "Satellite broadcast is not the favorite child of the FCC. Satellite is somewhat disruptive to a lot of vested interests in Washington, D.C."

Candeub says a formal decision from the FCC will have to wait until the commission gathers for a vote. The agency met met Wednesday, although the agenda didn't list a discussion on the XM-Sirius merger. Despite Sirius's assertion a decision will be reached by the end of the month, there is a possibility that an FCC approval could slip until the following meeting on April 10 unless a special meeting is called.

"The FCC could hold a special meeting at any time," says Janco Partners analyst April Horace. "Most merger-related issues are held at special meetings. Sirius remains very confident they'll get a decision by the end of the month. FCC Chairman

Kevin Martin has said he wanted a decision made by the end of the first quarter, and we're quickly approaching that deadline."

Candeub agrees that the FCC may be ready to relent. "It seems that the FCC is shifting its gears," he says. "They finally might be in the generic wave-it-on-through mode."

Sirius firmly believes it has put forth a compelling argument for the merger, but Janco's Horace says that the key term "a la carte" may be what ultimately sways the FCC to approve the deal. That is, a combined Sirius-XM entity would offer a variety of service combinations to its customers as opposed to one single programming option.

"

FCC Chairman Martin is very much an advocate of a la carte, specifically as it relates to cable and content operators, for quite some time," she says. "Sirius and XM have really capitalized on that notion. They're willing to do whatever it takes to get the merger done."

RBC's Bank agrees that the willingness of the two satellite radio operators to offer a la carte is a crucial factor.

"It gives Chairman Martin something he could use as a bargaining chip, especially on the cable side," says Bank. "It's a pet issue for him. If you're a believer that the FCC ultimately gets over the hurdle, that's a key reason why that's likely."