SIRIUS Satellite Radio and XM Satellite Radio announced plans for a “tax-free, all-stock merger of equals” in which XM shareholders will receive 4.6 shares of SIRIUS common stock per 1 share of XM stock owned.[1]  The planned merger has raised eyebrows as to whether the Federal Communications Commission (FCC) will approve the combination, particularly as under a current FCC rule SIRIUS and XM are prohibited from acquiring each other’s licenses.[2]  Based on this FCC rule, one has to wonder whether this is termed a “merger of equals,” despite what looks like an acquisition of XM by SIRIUS, to evade harsher FCC scrutiny.

I.  Terms of the Merger... of “Equals”?

Although termed a “merger of equals,” this transaction appears to fit the model of an acquisition of XM by SIRIUS.[3]  For one, XM shareholders will receive a certain amount of SIRIUS stock in exchange for their XM shares[4].  Second, XM shareholders will receive a 22% premium on that share transaction[5], resembling the price of a control premium in an acquisition.  Third, SIRIUS’s Chief Executive Officer, Mel Karmazin, will lead the combined entity as CEO, but XM’s CEO, Hugh Panero, “will not have an executive role” in the new entity[6].

The rationale for the terminology “merger of equals” may have to do with the current FCC satellite radio licensing rule.  In 1997, the FCC granted only two licenses and, as a measure to ensure ongoing competition, “stipulated that one of the holders would ‘not be permitted to acquire control of the other.’”[7].  Thus, the FCC stipulation suggests that the rule would only apply if either SIRIUS acquired XM, or vice-versa, but not if the two companies merged “equally.”

II.  FCC Reaction

In reaction to the SIRIUS-XM merger announcement, FCC Chairman Kevin J. Martin responded that to pass regulatory scrutiny the companies “would need to demonstrate that consumers would clearly be better off with both [i] more choice and [ii] affordable prices.”[8]  Whether this is a merger of equals or a disguised acquisition, the FCC will consider these factors in its regulatory review.

A.  More Choice

There are two possible angles from which one can consider whether a SIRIUS-XM combination will provide consumers with more choice.  The first is to consider whether the combined entity will offer greater programming choices to consumers than two separate entities.  The second is to consider whether the combined entity will offer more choice to consumers in general, taking into account other radio media sources.

SIRIUS and XM impliedly advocate for the first angle.  SIRIUS and XM claim that their combination will provide consumers with a “broader selection of content, including a wide range of commercial-free music channels, exclusive and non-exclusive sports coverage, news, talk, and entertainment programming.”[9]

The second angle would look to consumer choices in general.  Being that XM and SIRIUS are the only satellite radio providers[10], it seems as though consumers would have less choice with only one satellite radio provider instead of two.  However, the FCC could also look to a broader market of music providers, including “digital broadcast radio providers, wireless music services on mobile phones[,] and portable players such as iPods.”[11]  The problem with this argument, though, is that the broader market of “choice” exists with or without a SIRIUS-XM merger.  In other words, consumers already have the choice to listen to satellite radio or another musical source, regardless of whether there are one or two satellite radio providers.  Thus, whether the proposed merger will offer consumers more choice will turn upon whether SIRIUS and XM can deliver the broader radio content as promised.

B.  Affordable Prices

SIRIUS and XM describe how the merger will enhance financial performance[12], and one may think that such performance benefits will flow down to consumers.  SIRIUS and XM point to “better manag[ing] its costs through sales and marketing and subscriber acquisition efficiencies, satellite fleet synergies, combined R&D and other benefits from economies of scale.”[13]  However, one must also consider the immense costs currently faced by each company, as well as costs associated with the merger, which may affect consumer prices.  Both SIRIUS and XM currently need “to overcome their debt and depreciation costs.”[14]  In terms of merger costs, currently “XM radio receivers [cannot] receive signals from Sirius, and vice versa.”[15]  Although XM and SIRIUS are expending efforts to develop a receiver which would be compatible with both signals[16], one logically would not expect this development to be cost-free.  Another concern is that the presence of only one company in the market, rather than a pair of competitors, could give the merged entity “more pricing power as the only U.S. satellite radio provider.”[17]  Thus, while a merger may enhance financial performance, it is not clearly evident that the resulting benefits would overcome the costs currently borne by each company individually and the costs incurred to implement the merger.

III.  Predicted Outcome

This is likely to be a difficult challenge for SIRIUS and XM.  The FCC’s concerns about choice and affordable prices indicate standards against which the FCC may modify the rule if it does not see this as a merger of equals.  However, one should not discount the current FCC rule against one satellite radio provider’s acquisition of the other’s license.  In other words, before the FCC even considers choice and affordable prices, it should look to whether the “merger of equals” is really what it purports to be, or whether the combination is a linguistic loophole to the rule against acquiring a competitor’s broadcasting license.  All in all, even if the FCC accepts the proposed transaction as a “merger of equals” rather than as an acquisition of XM by SIRIUS, it is not clear that the transaction would result in more choice and affordable prices for consumers, leading one to question the practicable viability of the transaction.

[1] Press Release, SIRIUS Satellite Radio, SIRIUS and XM to Combine in $13 Billion Merger of Equals (Feb. 19, 2007), available at http://investor.sirius.com/ReleaseDetail.cfm?ReleaseID=230306.

[2] Satellite Radio Deal Puts Focus on Regulators, N.Y. TIMES, Feb. 20, 2007, available athttp://dealbook.blogs.nytimes.com/2007/02/20/satellite-radio-deal-puts-focus-on-regulators/.

[3] Phil Mintz, The XM-Sirius Deal May Not Fly, BUSINESS WEEK ONLINE, Feb. 20, 2007 (page unavailable on Westlaw).

[4] Id.

[5] Id.

[6] Id.

[7] Joseph Menn and David Colker, Satellite Radio Competitors Agree to Merge, L.A. TIMES, Feb. 20, 2007 at Business 1 (emphasis added).

[8] Editorial, Radio Daze: XM and Sirius, the Nation’s Two Satellite Radio Providers, Want to Merge.  The FCC Should Let Them, L.A. TIMES, Feb. 20, 2007, at 20 (emphasis added).

[9] Press Release, SIRIUS Satellite Radio, supra note 1.

[10] Menn and Colker, supra note 7.

[11] Id.

[12] See Press Release, SIRIUS Satellite Radio, supra note 1.

[13] Id.

[14] Editorial, supra note 8.

[15] Seth Sutel, Satellite Radio Rivals XM and Sirius Agree to Combination, CHICAGO TRIBUNE, Feb. 19, 2007, available at http://www.chicagotribune.com/news/local/michigan/chi-ap-mi-xmradio-sirius,1,2557495.story.

[16] Id.

[17] Id.