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2/29/2008
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XM, Sirius Extend Their Merger Plans

Other huge media mergers, including News Corp.'s $5.6 billion buyout of Dow Jones, may quell FCC fears that a combination will constitute a monopoly in satellite radio.

Like a bride and groom waiting for the Justice of the Peace to show up, XM Satellite Radio and Sirius Satellite Radio continue to cool their heels on their prospective merger while the Justice Department and the Federal Communications Commission drag theirs.

The two companies, who have been waiting for more than a year for approval of their planned merger, said Friday that they have extended their merger agreement for another two months, until May 1. The period for the merger talks to be finalized was originally set to expire on March 1.

Both Sirius and XM have dramatically cut their overhead in anticipation of the deal going through, carmakers (now the most important sales channels for sat-radio subscriptions) have begun adding new-fashioned audio options like in-dash MP3 players and ports for plugging in iPods, and several huge media mergers have been announced including Thomson's $18 billion acquisition of Reuters and News Corp.'s $5.6 billion buyout of Dow Jones.

If those deals go through as expected, it's hard to argue that the U.S. government has a valid stake in blocking the XM-Sirius combination, which is valued at just under $5 billion.

The argument against XM-Sirius is that the combination will constitute a monopoly in satellite radio, leaving aside the notion that the satellite providers compete with not only terrestrial radio but the other forms of media and broadcasting now available over both car systems and mobile devices such as smartphones. Wall Street seems to have come around to the position of Sirius CEO Mel Karmazin (who would likely head the combined company), that the sat-radio companies compete with a range of other outlets, not just each other.

Thomas Watts, an analyst at SG Cowen, said in a recent research note that the idea that XM and Sirius compete only with each other is "ludicrous." Along with other analysts including Blair Levin at Stifel Nicolaus, Watts now believes the deal is likely to be approved.

That's the opinion of Karmazin and XM CEO Nate Davis, who said on Thursday's conference call announcing XM's quarterly earnings that, though "the process has taken longer than everyone anticipated, we continue to look forward to a positive resolution to this matter soon."

Like Sirius, XM has managed to trim its losses through a combination of reduced overhead and continued healthy subscriber growth, primarily through deals with the major automakers, who have been quite supportive of the merger. XM recorded revenue of $308 million in the fourth quarter, up 20% from the same period last year, while adding 460,000 new subscribers in the fourth quarter. XM now has just over 9 million total subscribers, with Sirius at 8.3 million and closing the gap.

Both companies have spent billions to acquire new subscribers and sign big name talent like Martha Stewart, Oprah Winfrey, and Howard Stern. The companies made an important concession to regulators late last year when they agreed to tiered pricing, where subscribers could pay less depending on how many and which channels they choose. FCC chairman Kevin Martin has long urged the much larger cable industry to adopt a tiered pricing model.

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