Analysts: Tough conditions won't kill radio deal

July 17, 2008 7:20:36 PM PDT
Meeting a regulator's tough conditions for approval of Sirius Satellite Radio Inc.'s purchase of XM Satellite Radio Holdings Inc. may be tough but isn't likely to derail the deal, analysts said Thursday. "These do seem to be onerous additional conditions," said David Joyce, an analyst at Miller Tabak. But, Joyce said, "I don't think Sirius will walk away. I think they will still work on negotiating the conditions."

Jonathan Adelstein, an FCC commissioner, told The Associated Press Thursday that he would vote in favor of the deal if the companies agree to his tougher requirements.

Joyce said the concessions would be easier for Sirius and XM to swallow if they are compensated for setting aside 25 percent of their capacity as Adelstein has asked.

So far, two of the five members of the Federal Communications Commission have voted to approve Sirius' $3.1 billion buyout of the nation's only other satellite radio provider.

Sirius announced an agreement to buy XM in February 2007.

A vocal opponent of big media mergers, Democrat Adelstein was thought to be against the deal. But he may wind up casting the swing vote on the five-member commission and tip the balance for the deal's approval.

Adelstein wants the companies to cap prices for six years and make one-fourth of their satellite capacity available for public-interest and minority programming, among other conditions.

Adelstein's demands echo those of U.S. Rep. Ed Markey, chairman of the House Subcommittee on Telecommunications and the Internet, the Massachusetts Democrat who wrote the FCC Tuesday asking for similar concessions. FCC Chairman Kevin Martin had sought a three-year price freeze and a reserve of 12 of 300 channels for public-interest programming.

"Six years sounds a little egregious, depending on what conditions Sirius are attached," said Kit Spring, an analyst at Stifel Nicolaus & Co. But Sirius "may be amenable if it's a price freeze with a certain inflationary adjustment."

Spring said if the companies agree not to raise prices for six years, he would have to reduce the estimated $5 billion in annual savings and synergies he's projecting.

Sirius and XM need the savings, since neither company has had an adjusted operating profit or positive free cash flow on its own.

The two have been hemorrhaging cash as revenues have been insufficient to cover operating expenses. They are also saddled with debt: In the first quarter, which ended March 31, Sirius had long-term debt of nearly $1 billion while Washington, D.C.-based XM had $1.7 billion.

Last month, Sirius said it expects to post an adjusted operating profit and positive free cash flow in the first year after it buys XM.

New York-based Sirius said it expects savings of about $400 million in 2009 from combining their operations. It is forecasting $300 million in adjusted earnings before interest, taxes, depreciation and amortization, excluding capital costs for satellites.

Shares of Sirius rose 3 cents to $2.10 on Thursday, while XM was down 17 cents to $8.44.