Thursday, May 10, 2007

Regulatory Analysts Bullish On Sirius and XM Merger

May 10, 2007
Tyler Savery

There is a lot of opinion on the street relative to the proposed merger between Sirius and XM. Opinions vary greatly and this can make it difficult for investors to digest what is likely to happen. One way to wade through all of the opinion is to seek out analysts who follow the regulators on a regular basis.

In an article published by Communications Daily the sentiment on the merger seems more bullish than the opinions of analysts that follow the equities proper.


Regulatory Analysts Bullish on Satellite Radio Merger Approval
Communications Daily

FARMINGTON, Pa. -- Analysts who mainly follow regulatory issues said at the annual FCBA seminar they disagree with colleagues who expect DoJ or the FCC to reject the XM-Sirius merger. Blair Levin of Stifel Nicolaus said N.Y.-based analysts may be misreading the regulatory tea leaves. Anna-Marie Kovacs of Regulatory Source Assoc. and George Reed-Dellinger of Washington Analysis agreed that regulators are likely to approve the satellite radio merger.

"The 3 of us are in the minority on Wall Street," Levin said: "One of the more compelling arguments for the deal to go through is that the terrestrials have 3G. There's a lot of competition in the mobile audio market coming online." Some analysts may read too much into tough questions from Congress and a few negative comments at the FCC, Levin said, adding that DoJ will be key to whether the merger proceeds.

"I'm surprised so far I've not seen a lot of congressional resistance to the deal," Kovacs said: "I had expected a great deal more... It is looking better at this stage than I would have initially expected."

"I think XM-Sirius does get through," Reed-Dellinger said: "I think $3 billion to $6 billion of synergies will buy you a lot of conditions at the Commission." Likely conditions include rate caps and a requirement that the combined company offer programming a la carte, he said.

Programming is the likeliest focus of regulatory conditions, Levin told us.
"There'll be conditions dealing with indecency,² he said: ³That means either a family friendly tier or a la carte, some way in which people who want to buy a tier of programming without anything that anyone would consider indecent are able to do so. Second is a la cart on its own, which is not related to indecency but rather is related to the question of consumer choice."

Regulators also likely will strengthen restrictions against local programming, he said. The FCC will set a public interest programming condition, Levin said: "Finally, there's a series of things that one might think of as cleanup items -- the interoperability of devices." Levin doesn't expect regulators to require the merged company to sell spectrum, he said: "If you believe there's a broader market, you don't need the spectrum divestiture. If you don't believe it, the spectrum divestiture won't help you."

Reed-Dellinger said investors should be looking hard at the 2008 election.

"Every investor out there ought to be contemplating the likelihood of a Democratic FCC" and the implications for future mergers, he said. "2009 is really big," Levin said, predicting a govt.-wide shift from the post-9/11 focus on homeland security: "The govt. intervention in the marketplace in the first 6 months of 2009 will be more significant than at any other time in recent memory."

Reed Dellinger, which SSG has written about before specializes in following the regulatory process. Their focus on the value of the synergies seems to indicate that there is more than enough room for regulators to get some items they want without the companies giving up the farm to get the deal done. Another interesting comment regarding the election could help investors understand the timeframe involved. While not scientific in nature, it is my opinion that the process will get through the DOJ portion in the late September to October timeframe. I just don't see much action happening after Thanksgiving, and I can see regulators doing the bulk of their decision process late summer and early fall, with a goal of having their work complete before the holidays.

Position - Long Sirius, Long XM

5/10/2007 09:16:00 AM

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  • Looks like Wall Street has no clue on the merger. These guys sound much more knowledgeable.

    Thats what happens when you have a bunch of technology analysts following a media industry. Why satellite radio is labeled tech instead of media is beyond my comprehension. Radio is one the purest forms of media that ever existed.

    By Anonymous MUSCLE13, at May 10, 2007 7:00 PM  

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