University of Pittsburgh
School of Law

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[Vol.] PGH. J. Tech. L. & Pol'y [Art. #]

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Thomas Beline, Editor-in-Chief

Elana Kornblit, Executive Editor

George Ernst, Executive Editor

Journal of Technology Law & Policy
University of Pittsburgh School of Law
3900 Forbes Avenue
Pittsburgh, PA 15260
Telephone: (412) 648-1400

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A “Sirius” Decision: History and Facts of the XM / Sirius Satellite Radio Merger

by Todd M. Pappasergi,
University of Pittsburgh School of Law, J.D. expected 2008.
03/21/2007

 

On February 20, 2007, the world of satellite radio was turned on its head, as the two major competitors in the market, XM Satellite Radio Holdings, Inc. (XM) and Sirius Satellite Radio (Sirius) announced that the two companies will merge.[1]  The new company, which will continue to produce Sirius’ flagship Howard Stern program,[2] will be split evenly between the shareholders of the two entities.[3]  The two companies, which already fight over each other’s business with almost identical subscription rates,[4] will combine their services to allow consumers to have a wide variety of choices in music, talk-radio, and sporting events.[5]

 

Months of Speculation before the Merger

           

            As early as January of 2005, executives from Sirius and XM began to discuss a possible merger.[6]  Many in the industry, however, seemed to regard any potential merger as a fantasy, citing antitrust and FCC regulations.[7]  Monopoly became the main hurdle from the beginning because, as the merger rumors began in early 2005, Sirius and XM were the only registered satellite radio companies in the United States, creating a duly licensed “duopoly.”[8] 

            However, as many viewed monopoly as the first and most obvious hurdle to the merger, many others in the industry viewed the initial reports as nothing more than baseless rumor.[9]  Sirius CEO Mel Karmazin, soon after the New York Post and FOX News reported the merger discussions, stated quite clearly that nothing was in the works: “I have not met with the chairman or CEO of XM, so I have no idea where any of this came from.”[10]

            After the denials by Karmazin, it seemed the rumors had been put to rest.  Print media ceased discussions about the possible merger of the companies.  Then, almost two years after the merger rumors were squashed, news of talks between the two companies resurfaced.[11]  Ironically, it was Karmazin that initiated the new speculation by commenting on the practicability of a unification of the new media giants.[12]  Karmazin remarked, "Consolidation creates value . . . particularly when you are in the same industry as another company to be able to combine."[13]  With the growth of the companies since the initial speculations, a combination of the satellite giants would allow listeners to access all of the mega-personalities that the respective companies had acquired, such as Stern, Oprah Winfrey, and Bob Dylan.[14]  The speculation became even more significant during this time as stocks for both companies plummeted, despite these major additions to each company’s daily lineup.  As The New York Times reported in the weeks prior to the announcement, “Sirius and XM shares have taken a battering on Wall Street, with prices for both off about 50 percent from their year-ago levels.”[15]  The article continued, “Both companies have continued to lose hundreds of millions of dollars because of marketing and other subscriber acquisition expenses.”[16]  Surprisingly, however, both companies saw increases in subscriptions during the pre-merger financial troubles.[17]

            Despite what many pundits in the industry viewed as an almost certainty, a month before the announcement, FCC Chairman Kevin Martin rejected the possibility of any merger between XM and Sirius.  Martin made clear that FCC regulations state that “the two satellite radio operators must remain in place.”[18]  He went even further, stating that a prohibition on one entity owning both companies existed in FCC regulations.[19]

 

The Merger

 

            Despite these concerns, the two companies announced the merger on February 20, 2007.[20]  The proposed merger would bring a combined $11.4 billion into one corporation.[21]  Of the details released at the announcement, most noteworthy were the following:

·        The deal is a structured “50-50 merger of equals,” giving all shareholders an equal stake in both companies;[22]

·        Current Sirius CEO Mel Karmazin, the person who denied the merger talks for months prior to the deal, will serve as the CEO of the new company;[23]

·        XM Chairman Gary Parsons would serve as chairman of the board;[24]

·        The new company would begin with over $2.3 billion in long-term debt.[25]

·        Either side may opt-out of the deal on March 1, 2008 if FCC approval has not yet been granted.[26]

 

·        XM shareholders will receive a fixed exchange of 4.6 shares of Sirius for each of their shares.  [27]

 

XM has consistently had more subscribers than Sirius since competition between the two companies began in 2002.[28]  Although it is unclear what the name of the new company will be, the fact that XM shareholders will be getting Sirius stock seems to indicate that, at a very minimum, the Sirius name will remain.  This is just one of the many details remain to be finalized in the coming months.

The new company would, once combined, have in excess of over 14 million paid subscribers.[29]  Further, advertising would generate approximately $70 million per year, if current figures hold steady.[30]  As already stated, however, many FCC obstacles remain in the way.  Thus, it remains to be seen whether the merger will even occur, let alone be successful enough to save to struggling companies.

 

Quick Facts[31]

 

·        Merger would be tax-free and all stock;

·        Exchange ratio (fixed) – 4.60 shares of SIRIUS for each XM share;

·        Equal ownership between Sirius and XM shareholders;

·        CEO: Mel Karmazin, current CEO of Sirius;

·        Chairman of the Board: Gary Parsons, current CEO of XM;

·        Board would be composed of twelve directors, the chairman, the CEO, four independent members chosen by XM and Sirius, and representatives from major auto manufacturers GM and Honda;

 

·        Anticipated to close in late 2007, subject to FCC and shareholder approval;

 

·        Shareholder approval expected during the Summer of 2007;

 

·        FCC approval, if granted, expected to occur late Fall of 2007.

 

More Information

 

·        To view the joint release statement by Sirius and XM:

o       http://xmradio.mediaroom.com/index.php?s=press_releases&item=1423

o       http://investor.sirius.com/ReleaseDetail.cfm?ReleaseID=230306

·        To view a PowerPoint presentation on the merger:

o    http://investor.sirius.com/downloads/

    InvestorPresentation022007.pdf

 

·        Law Firms Involved in the Merger Process:[32]

o       For Sirius Satellite Radio:

§         Simpson Thacher & Bartlett LLP

§         Wiley Rein LLP

o       For XM Satellite Radio:

§         Skadden Arps, Slate, Meagher & Flom

§         Jones Day

§         Latham & Watkins

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