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Policy

Static Over Martin’s Satellite Radio Talk

1/19/2007 7:00 PM Eastern

Shares in Sirius Satellite Radio and XM Satellite Radio plunged last Wednesday, after Federal Communications Commission chairman Kevin Martin appeared to quash growing speculation concerning a potential merger between the two.

XM stock took the biggest hit, dipping $1.69 per share (9.86%) on Jan. 17 to $15.45 apiece. Shares of Sirius fell 29 cents each (6.99%) to $3.86 per share last Wednesday.

Taking Stock
Where the big satellite-radio players stand in the market:
Closing Price
1/03/07 1/16/07 1/17/07
XM Satellite Radio $15.21 $17.14 $15.45
Sirius Satellite Radio $3.74 $4.15 $3.86
Source: NASDAQ Web site

Fueling the declines were comments Martin made at a press conference Jan. 17 when asked whether the FCC would be open to a merger between the two. Martin said that agency rules prohibit “one entity owning both of those businesses,” according to published reports.

Martin appeared to refer to the original 1997 satellite-radio licensing order that requires there be two independent satellite radio licensees.

Speculation concerning the potential merger between the two largest satellite-radio providers has been heating up of late, with executives at both companies apparently more open to a deal.

ANALYSTS ARE BULLISH

And though talk of a possible merger between the two satellite-radio giants has gone on for years, some analysts are beginning to think that a merger would pass its biggest hurdle — federal regulatory approval — if the deal is done soon.

Sirius CEO Mel Karmazin got the wheels rolling again on a possible combination with Sirius earlier this month when, at the Citigroup Entertainment Media & Telecommunications conference in Las Vegas, he said that a merger could serve the best interests of both companies.

“One way you can create shareholder value is through consolidation, particularly in a fragmented industry like radio,” Karmazin said at the conference. “Conceptually, a deal makes sense and you could add value from synergies.”

Further fueling the increased speculation over a deal were XM’s poor fourth-quarter subscriber results. For the period, XM reported 7.63 million subscribers, an increase of about 1 million gross customers. For the same period, rival Sirius reported gross subscriber additions of 1.25 million.

Although XM is still the largest satellite-radio service provider — Sirius ended 2006 with about 6 million subscribers — Sirius is growing at a much-faster rate.

Shares of XM were up 12.7% ($1.93 each) from $15.21 to $17.14 per share between Jan. 3 and Jan. 16, mainly on merger speculation. Sirius shares also got a lift during that time frame (11% or 41 cents each) for the same reason. Martin’s comment basically erased most of that appreciation.

In a research report, Oppenheimer cable and satellite analyst Tom Eagan said the merger hype was premature, adding that it is unlikely a merger will occur in the near term. But Eagan saw the decline in the share prices of both companies as a buying opportunity.

“With today’s pullback of the equities, we recommend investors buy the [Sirius] and [XM] shares on the basis of improving fundamentals,” Eagan wrote in a research note Jan. 17.

Although Eagan believes that a merger is unlikely, others feel that there is still a possibility the two companies could join forces.

FEW REGULATORY HURDLES

In a research note, former FCC commissioner and Stifel Nicolaus analyst Blair Levin wrote that the original satellite radio licensing order was written 10 years ago and was made when there was virtually no satellite radio industry.

“The FCC would be free to reconsider the predicate for that rule when presented with a merger application, and indeed that is precisely the analysis the government would do in reviewing the merger: whether the competitive conditions have changed over the last 10 years to such an extent that this bar is no longer justified,” Levin wrote. “If the FCC concludes that increased competition to satellite radio justifies a broad product-market definition, we believe it would eliminate that rule. If it concludes that the new products — such as Apple i Pods, music services, and Internet programming over wireless systems — are not substitutes, then it would retain the old rule.”

Adding to the speculation for the merger is the weak fourth quarter results XM Satellite reported earlier this month — gross additions were about 1 million for the year, with XM ending with about 7.63 million subscribers. That is well below the 9 million customers that the company predicted last January it would have by the end of 2006. Since then, XM has revised its subscriber growth downward on two occasions.

In a research report Jan. 5, Sanford Bernstein analyst Craig Moffett said the lower than expected subscriber growth could be the result of one of two things — either gross additions were light, or churn is on the rise — neither of which bodes well for the company.

But Moffett wrote that the poor results could have a silver lining: they could weaken XM Satellite’s board of directors resolve to hold out for a high premium price from Sirius.

“We view it as increasingly likely that XM and Sirius could at least attempt a merger sometime this year [although whether a merger could pass muster in Washington is unknown],” Moffett wrote.

Despite Martin’s comments, some still analysts believe that the Republican-dominated FCC could be swayed to approve a deal, especially if it considers the entire radio market not just satellite radio in its anti-trust reviews. But Levin wrote that a deal would have to happen before the 2008 presidential election, when a change in administration could possibly cloud a review.

September