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FCC says approval is unlikely, but the two satellite radio giants have struck an agreement

Today Sirius and XM announced that both companies have entered an agreement in which the two will merge to form the largest satellite radio service provider in the country. Under the terms of the merger, the single entity formed by Sirius and XM would amount to a total organization value of $13 billion USD. XM shareholders will also receive a fixed exchange ratio of 4.6 Sirius shares for each XM share they own. When the merger is complete, Sirius and XM shareholders will each own 50 percent of the combined company.

According to representatives from both companies, the new combined company will have 12 directors including the current CEOs from both Sirius and XM. Both companies will also continue to operate independently until the merger is complete. As of this writing, a name has not been determined for the new company as is where the new headquarters will be.

DailyTech last reported on rumors surrounding the merger of Sirius and XM. The FCC voiced its opinion early on in the talks between Sirius and XM, indicating that it did not approve of the two companies merging because it would create a satellite radio monopoly. FCC chairman Kevin Martin indicated that an approval of the merger would be unlikely. According to both Sirius and XM however:
The combined company will benefit from a highly experienced management team from both companies with extensive industry knowledge in radio, media, consumer electronics, OEM engineering and technology. Further management appointments will be announced prior to closing. The companies will continue to operate independently until the transaction is completed and will work together to determine the combined company's corporate name and headquarters location prior to closing.
Previous reports on both Sirius and XM indicated that both companies were suffering from losses, especially in 2005 going into 2006. Revenues were dropping and subscribers were leaving from both companies. A merger of the two companies would make sense from a corporate stand point but both companies have to pass grueling anti-trust regulations before the two combine.

Gary Parsons, Chairman of XM Satellite Radio and Hugh Panero, does not seem deterred by the FCC's statements.  "We are excited for the many opportunities that an XM and SIRIUS combination will provide consumers. The combined company will be better positioned to compete effectively with the continually expanding array of entertainment alternatives that consumers have embraced since the Federal Communications Commission (FCC) first granted our satellite radio licenses a decade ago."

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RE: Good news...
By TomZ on 2/20/2007 10:31:30 AM , Rating: 2
Well, one thing we can all be sure of is that satellite radio service costs will probably increase after such a merger. While I'm sure they can consolidate redundant resources between the two organizations to cut costs, a more effective way to help the bottom line is to increase the average revenue per subscriber. And since there is no longer any competition for satellite radio, they have more ability to set prices in the market since there is not any direct alternative for customers.

RE: Good news...
By masher2 on 2/20/2007 11:49:16 AM , Rating: 3
Why would subscription rates increase? Sirius and XM aren't competing with each other on price...they're both competing against free terrestrial radio. A rate increase shrinks their customer base dramatically, a fact both companies realize, which is why they're already pricing their service below cost.

I'm confident that, should this merger be approved, it will mean no change to rates in the short term, and a small decrease in the mid-to-long term. They can't afford to raise rates, else they'd price themselves out the market entirely.

RE: Good news...
By masher2 on 2/20/2007 11:51:10 AM , Rating: 2
I just want to add that, should the merger be denied, the end result will stil be only one company in satellite radio. Both Sirius and XM are losing cash fast; one of them will be out of business soon.

RE: Good news...
By TomZ on 2/20/2007 3:30:50 PM , Rating: 2
I just figure that, as it is today, neither company could really have rates any higher than the other, since to most consumers who have decided to get satellite radio, the monthly cost would probably be an important decider between the two. Now, the combined company will be free to increase the price up to the point where fewer people will choose to buy, which I assume is higher than the price is today.

I would see this as the same as cable TV rates. I can't believe that the operating cost justifies rates in range of $50-100/month that most people pay, and I really believe that if there was some competition in these markets, the costs would come down.

RE: Good news...
By masher2 on 2/20/2007 4:37:00 PM , Rating: 3
The difference here is that XM and Sirius combined still only have roughly 12M subscribers in North America-- a small fraction of the total populace. Whereas over 2/3 of all households subscribe to cable. So clearly most consumers are choosing terrestrial radio over satellite, and thus increasing rates results in a "Laffer Curve" style revenue decline.

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