Sirius Satellite Radio Inc.'s purchase of XM Satellite Radio Holdings Inc was approved with conditions by US communications regulators on Friday, clearing the way for a deal that will leave just one satellite radio service in the country. This brings to an end the protracted rounds of approvals towards the longest running merger in American corporate history spread over almost a year and half.
Although there had been speculation earlier this week of such an approval materializing, it had been based on the assent of Democrat FCC commissioner Jonathan Adelstein who had promised to approve the deal subject to certain conditions. (See: XM Radio - Satellite Radio closer to merger as FCC set to approve deal conditionally)
Even though Adelstein finally voted against the buyout, the deal managed to sail through 3-2 with the tiebreaker coming Friday night from Republican commissioner Deborah Taylor Tate. Fellow Democrat Michael Copps joined Adelstein on the minority opposing side. Joining Kevin Martin and Tate in approving the deal was Republican commissioner Robert McDowell.
"They kept each other on their toes," Adelstein said of the two companies as he explained his opposing stance. "I hope they keep their edge and don't become a fat and happy monopoly."
"I think it's going to be, in the end, a good thing for consumers and be in the public interest," said FCC chairman Martin." Consumers will enjoy a variety of programming at reduced prices and more diversified programming choices."
Subscribers will not have to buy new radios to receive a mix of programming from both services, according to the companies. But if they want to pursue a special pay-per-channel a la carte option, they will need new sets.
Tate had insisted that the companies settle charges that they violated FCC rules before she would approve the deal. The companies agreed this week to pay $19.7 million to the US Treasury for violations related to radio receivers and ground-based signal repeaters.
The long-running regulatory review was watched closely by exasperated investors anxious for a resolution as well as 18 million-plus satellite radio customers with questions about what impact the merger would have on their service.
The approval was a major blow for the land-based radio industry, which lobbied hard against the buyout. It was also opposed by consumer groups, various members of Congress and state attorneys general, all of whom argued a satellite radio merger would hurt consumers and was not in the public interest.
The companies said the combination would create hundreds of millions of dollars in cost savings and lead to greater choice in programming for subscribers and flexible pricing options.
Tate released a statement Friday night praising the commission's decision to punish the companies for rules violations before acting on the merger and supporting pro-consumer conditions imposed on the deal.
Under the terms of the consent decree, XM will pay $17.5 million and Sirius will pay $2.2 million to resolve interference complaints and violations related to land-based signal repeaters the companies operate to deliver programming.
The final merger agreement did not require the combined company to include a chip in its radios that will allow customers to receive digital signals from land-based radio stations, which would have helped the land-based radio industry.
Tate, who was lobbied intensely by the industry in the final weeks, said she "could not in good conscience support a government-mandated requirement on the backs of American consumers at this time."
Martin said the agreement is nearly identical to what he circulated among other commissioners when he first recommended approval for the deal more than a month ago.
The companies first applied for permission to combine in March 2007. The Justice Department approved the deal in March of this year without conditions, saying the companies don't really compete because customers must buy equipment that is exclusive to either XM or Sirius, and subscribers rarely switch providers.
DOJ also agreed with the companies' argument that they compete with other forms of audio entertainment, including digital radio, Internet-based radio stations and even devices like Apple Inc.'s iPod. (See: XM-Sirius merger approved by US Justice Department)
FCC approval faced a steeper climb because the companies were prohibited from combining under terms of their licenses. The agency struggled to come up with a way to show that allowing a satellite radio monopoly was in the public interest.
The companies voluntarily agreed to a set of conditions, including a three-year price cap and an 8 percent set-aside of "full-time audio channels" for public interest and minority programming. They will also adopt an "open radio" standard that may lead to a greater variety of features in radios and greater competition among manufacturers.
Sirius and XM also have promised to include a limited "a la carte" offering that would be available within three months of the close of the deal and allow listeners to pay only for the channels they want to receive.
Theoretically, flexible pricing might encourage more people to sign up for service. But it may not work out that way in practice. Most people sign up for satellite radio after buying new cars. A few dollars' price difference in a service plan may not push that many more buyers to subscribe. Instead, many existing XM or Sirius users may simply downgrade to the cheaper option.
Analysts are also concerned about the company's ability to wring cost savings, which some analysts say will total as much as $4 billion over five years. Cutting expenses won't be easy as the company implements merger conditions, pays compensation to employees whose jobs are made redundant by the merger and issues debt to fund operations and restructuring costs. Neither company is profitable on its own.