XM and Sirius on Tuesday took two key steps closer to having their merger finalized as shareholders from both companies gave their blessing to the deal, which is still awaiting regulatory approval.
Sirius shareholders voted at a special meeting to amend the company’s certificate of incorporation to allow the merger and approved the issuance of the stock needed to consummate the deal, which calls for XM shareholders to receive 4.6 shares of Sirius for each of their XM shares.
Later in the day, XM announced its shareholders also approved the merger-related questions placed before them at a special meeting in Washington, D.C., where the company is based.
The Last Hurdles
The shareholder approvals were among the last remaining hurdles but in reality pale in comparison to the feat of clearing the potential regulatory blocks to the deal being done.
The Federal Communications Commission (FCC) has been mulling the merger for some time, and has not said exactly when it might vote on whether to block the deal — valued at around US$4 billion based on current stock prices — allow it to be completed with conditions, or allow to proceed as proposed.
Ninety-six percent of Sirius shareholders who voted cast ballots in favor the merger, the company said, and XM noted that its preliminary tally showed 99.8 percent of the votes cast backed the deal.
Sirius Chairman and CEO Mel Karmazin called the vote a “significant step in the approval process.”
“We look forward to completing the merger by the end of the year and, together with XM, becoming an even stronger competitor in the ever-expanding audio entertainment marketplace offering consumers more choices at lower prices,” Karmazin said.
The shareholders’ voices add to the chorus of groups and individuals calling for the deal to be allowed to go forward, XM Chairman Gary Parsons noted. “We are proud to have received support for our merger from organizations representing African Americans, women, rural Americans and Hispanics, as well as from former FCC chairmen and commissioners and a diverse group of elected officials,” Parsons said.
XM shares were up more than 5 percent to $14.46 in afternoon action Tuesday while Sirius stock climbed 4.4 percent to $3.56.
XM, Then FCC
Only regulatory approval now stands in the way of the combination, which the companies have billed as a merger of equals.
While the U.S. Justice Department has been looking at the deal to see if it passes muster with federal antitrust laws, it’s widely believed it is leaving the merger’s fate in the hands of the FCC.
When it originally licensed the satellite carriers, the FCC said it would not allow the two companies to merge into one. Sirius and XM have argued vociferously that the original prohibition came before today’s mobile and at-home music market had fully evolved — before the rise of MP3 players and streaming online radio stations.
The satellite companies are hoping the FCC will consider those technologies as it weighs the deal. Sirius and XM have also said theywould offer a la carte pricing options after the deal closes, assuring regulators that the merger would lower prices for some consumers.
The companies have been expressing hope the deal could be closed by the end of this year or early in 2008, but the FCC issued a request for additional information to both companies just last week, suggesting staff-level review is ongoing. Once that is completed, a recommendation to the commissioners themselves will be made and then a vote taken.
Last week, the FCC asked both companies to provide documents relating to marketing agreements with retailers and original equipment makers,sought additional input on the notion that the merger will result in lower prices and asked the companies to respond by the end of this week.
Time Will Tell
Regulators may be struggling with whether there is any way to condition the deal. While major mergers that leave few competitors in a space often win approvals with some requirements to address concerns — wireless companies have been ordered to sell off some regional assets, for instance — the fact that only two satellite players exist makes that less likely.
Justice Department clearance is likely to come first and if it approves the deal, the FCC could be prompted to act quickly to craft an approval that contains some limited conditions, Stifel Nicolaus analyst Blair Levin told the E-Commerce Times. FCC Chairman Kevin Martin is a key player in the drama, he said.
Though it’s not known how he feels about the merger, Levin noted that Martin has been a vocal supporter of a la carte offerings from cable companies and said the move by Sirius and XM to promise scaled-down choices post-merger could have helped convince him to go along with the deal.
“They have been lobbying heavily and have had a lot of supporters come on board over the past few months,” he added.
Battling Customer Churn
Also on Tuesday, XM and Sirius released excerpts from an interview that Reed Hunt, a former FCC chairman, gave to the companies’ attorneys, which was subsequently submitted to the FCC as part of the record in the merger deliberations.
In the interview, Hunt — who helped formulate the rules under which the two gained their original licenses — said the deal would better enable the satellite carriers to compete with terrestrial radio.
“It seems to me that there’s no indication of any anticompetitive outcome if they do combine, so let’s give them a chance to have a sharper point on the arrow and see if they can do better in terms of penetrating the listener audience,” Hunt said.
Meanwhile, even more than nine months after the deal was announced — after months of speculation — the business reasons for the merger remain as acute as ever, JupiterResearch analyst Barry Parr told the E-Commerce Times.
The companies continue to spend heavily to attract new customers and are now seeing subscriber growth rates start to fall, he noted.
The companies continue to battle customer churn, meanwhile, and merging will help them create a more stable customer base, Parr added.
“Merging will reduce costs and overhead, but this deal is about subscribers and how to keep them once they’ve signed them up,” he said.