Thursday, March 01, 2007

RBC Gives Satellite First Round

March 1, 2007

First Round Goes To Satellite Radio But Its Just An Exhibition Match


SIRI CEO Mel Karmazin Testifies Before Congress on Proposed Merger Investment Opinion

Sirius CEO Mel Karmazin testified before Congress on Wednesday. On Wednesday, Mel Karmazin along with the President of the National Association of Broadcasters and others testified before Congress on the proposed merger between XM and Sirius. The outcome of the testimony has little bearing on the regulatory approval of the merger, which falls exclusively within the domain of the FCC and Department of Justice. However, to the extent the hearing is
reflective of the general political mood in Washington, we found several elements of the discussion interesting.

We were surprised at how little disagreement there was among participants
that satellite radio operates in a broadly competitive environment.

Even the National Association of Broadcasters conceded that terrestrial radio competes with satellite radio. Furthermore, several Democratic representatives from whom we would have expected more opposition actually voiced opinions that a merger satellite radio company would not be a monopoly and should be approved. We have seen quite a bit of speculation from the sell-side (including us) that XM and Sirius are on a short time frame to get the merger completed amidst the looming specter of a (presumably less business friendly) Democrat in the White House. Should positive remarks from Democrats continue, it could ease concerns that there is a finite time limit on the approval process.

On the face of it, Karmazin seemed to make a fairly compelling case that the merger is good for consumers.

Predicating his argument on "more for less", Karmazin asserted that consumers would get more content (i.e., NFL and MLB, Howard Stern and Opie & Anthony) for a lower subscription price. He also repeated several times that XM / Sirius would agree not to raise prices in order to get the merger approved. What was unclear - and what could have been more revealing had he been asked the specific question - was whether he was referring to the combined price of XM and Sirius ($26) or the price of just one ($12.95) as the benchmark for the merged company.

First round goes to satellite radio but its ultimately just an exhibition match.

Conservatively, we'd say it was a tie and we're actually inclined to suggest that proponents of the merger came out ahead. However, while they aren't meaningless, the Congressional hearings essentially serve more as a public forum than anything else. The current arb spread between XM and SIRI's trading prices suggests the market is ascribing a ~30% chance that the merger is approved. We continue to believe the odds are better than 50/50.

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3/01/2007 12:49:00 PM

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