An attempt to merge Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc., the two largest pay-radio providers, is likely to occur within the next 18 months, Denver-based analyst Kit Spring of Stifel Nicolaus & Co. said.
A combination would create $650 million in annual savings, Spring said in a report published Nov. 27. He put the chances of a bid by one side or the other at 75 percent.
XM and Sirius have spent billions of dollars on competition with each other, signing up celebrities such as Howard Stern, Martha Stewart, Bob Dylan and Oprah Winfrey. Their share prices have each declined by more than one-third this year, partly because of investor concerns over marketing and programming costs.
“A successful merger could create $7 billion of shareholder value,” Spring wrote. He has a “buy” rating on both stocks.
Sirius Chief Executive Officer Mel Karmazin and XM Chairman Gary Parsons have publicly discussed the benefits of a merger, and both have said they think regulators would block one.
Karmazin said in June he’d consider buying XM if price and regulatory concerns weren’t obstacles. He no longer thinks regulators would block a buyout, he said in a SmartMoney.com interview published last week.
“I personally believe regulatory agencies are not a problem,” he said, according to the Nov. 24 SmartMoney report.
XM spokesman Chance Patterson said today the company declines to comment on merger speculation.
A combination would offer customers more channels of talk, sports and music programs and would lower the cost of programming, marketing and new satellites.
Spring said in his report there is a 55 percent chance that a merger would be approved by the U.S. Department of Justice and the U.S. Federal Communications Commission. If satellite radio were defined as a competitor to terrestrial radio, then Sirius and XM’s combined market share would be 6.8 percent, increasing the chances of approval, he said.
Karmazin, 63, has a track record of expanding companies through acquisitions. He ran terrestrial radio company Infinity Broadcasting, merged it with CBS Corp., then sold the combined company to Viacom Inc.
The report also said that Sirius would be the likely acquirer because its market value is higher than XM’s, and Sirius’s management team would probably run the combined company. He estimated a buyout at $21 per XM share, which equates to a 45 percent premium over yesterday’s closing price.
Sirius said on Nov. 8 that its third-quarter loss narrowed to $162.9 million from $180.5 million a year earlier, after reducing the marketing costs needed to lure each new customer. XM’s loss shrank to $83.8 million from $131.9 million.
Sirius is growing faster, adding 441,101 net customers in the third quarter to XM’s 286,000. XM had 7.2 million subscribers at the end of the quarter, compared with 5.1 million for Sirius. XM has cut its forecast for subscriber-growth twice this year because of a shortage of radios in stores.
