BOA Report Bearish On Merger
BOA's Jacoby issued a report today regarding Sirius, XM, and the merger. Report Excerpts:
Sat Radio: Momentum Appears to Be Swinging Back toward Denying the Merger
- Our D.C. contacts believe that XM and Sirius have lost momentum in their attempt to receive regulatory approval for their merger – we now believe that the chance of a deal getting through has fallen to 30% or less. This conclusion is based upon discussions with our D.C. contacts regarding the recent reply comments filed concerning the NPRM on the "rule" change. Our contacts believe that:
a) XMSR/SIRI’s arguments were somewhat weak regarding the NPRM and
b) the NAB and consolidated broadcasters’ filings did a nice job of highlighting the administrative law issue for the merger hopefuls, and added a new argument that a broader audio market definition should allow for the elimination of local radio ownership caps. (In other words, allowing the merger would open Pandora’s box and set a precedent that would encourage a wave of media consolidation.)
1) XMSR/SIRI essentially “brush off” of the existing rule prohibiting one licensee from owning both SDARS licenses. In their combined filing XM and Sirius essentially state that the “Commission retains the flexibility to revisit” the rule and “can and should repeal or modify its decade-old statement and approve the pending merger.” Our contacts view the XMSR/SIRI filing as simply a request to ignore the current rule and lacked the substance the FCC likely will require.
2) NAB argues that you can’t simply destroy an existing rule. Our contacts view the NAB’s filing as a strong analysis of the key administrative law issue that prohibits the two SDARS services from merging. The NAB argument is that the FCC can't waive a rule if the result is to destroy the rule, and the “Commission would have to explain why such an abrupt and unprecedented departure from its long-standing policy of promoting spectrum competition.”
3) Consolidated broadcasters believe that if the market is “audio entertainment” then the FCC should abolish local terrestrial ownership restrictions as well. Our contacts believe that this argument could give the FCC the most trouble. The broadcasters state that if the FCC were to allow the merger, “then it would be impossible to justify any continued regulatory limitation on AM/FM broadcast radio ownership.” The problem for the FCC is that they are in for a huge court battle on radio ownership if they simply waive the rule – the risk is that the FCC will lose AGAIN at the courts on ownership issues.
- Although investor focus remains on the merger, costs for the OEM ramp are higher than previously expected. OEM installations are ramping up, but it appears that SAC/CPGA costs are rising ahead of expectations as well. We continue to believe that there is a business here (deal or no deal), but we struggle to model the economics (there is very little public disclosure with respect to costs incurred by XM and Sirius for OEM distribution).
- Maintain neutral on XMSR & SIRI - The stocks seem to suggest that the probability of regulatory approval for the merger is roughly 55%+. This is up significantly over the past several months and is much more optimistic than the assessment of our D.C. contacts.
- Sector View: Audience erosion will continue to cap top-line growth for terrestrial radio over the next decade, whether radio "goes Google" or not.