Stifel analyst Blair Levin issued a note today regarding the proposed Sirius and XM merger. According to Levin, the rumblings on the street are stronger now than in the past, and they feel that the merger will pass DOJ muster.

REPORT EXCERPTS

We are hearing increasing chatter that the Department of Justice Antitrust Division is about to announce whether it will clear or sue to block the merger of XM (XMSR) and Sirius (SIRI).

We caution that we have heard such chatter before and that there is no particular deadline driving the DOJto decide. The volume of the chatter however, suggests to us that the likelihood of a decision being close is significantly higher than in the past.

We continue to believe, as we have from the time that the merger was announced, that while the question is a close one, the DOJ is more likely than not to approve the merger. If the DOJ announces it will not move to block the deal, the next step will be for the companies to gain the approval of the Federal Communications Commission, which is reviewing license transfers needed to close the deal. In that case,we believe the companies will be able to win FCC clearance, but we expect the agency will seek and obtain a number of conditions on the merger in a process that could take a number of weeks. Among the potential conditions that various parties may ask the Commission to consider are those that would require the combined company to:

  • Offer a smaller package at a monthly price lower than the current basic package, with additional channels being offered on an à la carte basis, similar to what the companies agreed to do in the spring, with the final details to be negotiated.
  • Move all "indecent" programming from the basic package to à la carte offerings.
  • Freeze prices for some period of time.
  • Assure that the radios currently being used by subscribers continue to receive the satellite signals.
  • Provide some minimum amount of public interest programming.
  • Address exclusive deals for content or equipment in some way.
  • Make interoperable radios (that work on both XM and Sirius systems) commercially available by a date certain.
  • Make the satellite radios interoperable with HD (High Definition) radio.

If the DOJ, instead, announces it will oppose the proposed merger of XM and Sirius, the situation is more complicated, but we believe the bottom line is the deal is unlikely to obtain government approval. Sirius has said in the past the companies would challenge such a decision, but if they do, we believe their chances of success are limited. Although companies sometimes successfully challenge a DOJ or FTC decision to block a merger, as happened with Oracle-PeopleSoft and Whole Foods-Wild Oats, this is rare. We believe a successful challenge would be even more difficult in this case because the companies also need to obtain clearance by the FCC. We believe that if the DOJ moves to block the merger, the FCC is most likely to follow suit and disapprove the merger. The FCC could even sit on the decision for some time, during which the companies would feel pressure to move on with their separate existences. It is also possible, however, that Chairman Martin could decide that the agency should postpone its consideration of the merger until after the court has ruled on the DOJ complaint.

Tyler Savery Position - Long Sirius, Long XM