In a research report issued today, Stifel analyst Blair Levin outlined the merger from various perspectives, but ultimately did not change any outlook regarding chances for approval. Merger proponents will pull out the positives, while merger detractors will highlight the negative aspects. In essence, the report issues a balanced look at what could already be transpiring with regards to the merger, and what possibilities exist going forward.

REPORT EXCERPTS

• The proposed merger of XM (XMSR) and Sirius (SIRI) is still pending at the Department of Justice Antitrust Division. The delay in reaching a decision does not, in our view, change the analysis of the likelihood that the Division is leaning one way or another.

• 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.

• 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 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.

Current Status and Why the Delay Doesn't Tell Us Anything Meaningful. The proposed merger of XM (XMSR)and Sirius (SIRI) is still pending at the Department of Justice Antitrust Division. Like many others, we believed it was likely that the DOJ would have reached a decision before the winter holidays. The delay in reaching a decision does not, in our view, change the analysis of the likelihood that the Division is leaning one way or another.

We think there are three plausible explanations for why there is a delay. First, the Division could be preparing for litigation. Second, while the key decision makers are leaning toward approving the deal, they want to provide time for staff in the Division who oppose the deal to have the time to make their arguments and work with the evidence in a final, though probably unsuccessful, effort to move the key decision makers to change their minds. Third, there is remaining uncertainty on the part of the key decision makers as to what they want to do and they are continuing an especially comprehensive job of reviewing the evidence in what is, in many ways, a difficult case. We think these three scenarios are, roughly speaking, equally plausible and therefore the delay doesn't cause us to change our longstanding view that the decision is a close call but the deal is still slightly more likely than not to obtain approval.

There is no deadline for the DOJ decision, though we would guess that it will come sometime this month. In the rest of this note we lay out what we think happens next if the DOJ says yes and if they say no.

If DOJ Says Yes. If the DOJ announces that it will not move to block the proposed satellite radio merger of XM and Sirius, the playing field will shift to the Federal Communications Commission, where the companies have to get the support of a majority of the commissioners for the finding that merger-related license transfers are in the public interest. We believe the companies will be able to do so. While there is always a risk that three commissioners could decide the merger is not in the public interest -- and in this case we suspect at least one and maybe two commissioners will vote that way -- we note the FCC has never, to our knowledge, rejected a merger approved by the DOJ. We don't believe this one is likely to be the first.

Nonetheless, we do think commissioners will be interested in imposing a number of potential conditions on the merged company. 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 packages 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; and

• make the satellite radios interoperable with HD radio.

We note that the companies have already agreed to the first three conditions, though the final details may require some haggling. We think the continued operations of the existing radios will be important to the Commission. We don't see the debate as to the other conditions as being particularly problematic for the companies. In many respects,conditions such as interoperability between the XM and Sirius services or public interest programming are consistent with a merged company's incentives and plans. One wild card: the National Association of Broadcasters (NAB), which vociferously opposes the merger, is likely to now ask the Commission to strengthen its rules limiting the merged satellite radio company from offering local programming. We do not think the broadcasters will be able to go much farther than the existing rule (which requires all programming to be offered on a national basis) without running into significant First Amendment problems, but we expect the NAB to lobby heavily for the Commission to put related conditions on the deal.

We also note that there has already been a significant amount of negotiation on the conditions, particularly between the companies and the FCC chairman's office on the à la carte structure. The other commissioners are now expected to become more engaged, however, and we expect that the process to finalize the conditions and approve the deal could take a month or two. The timing will depend to a significant extent on whether the Democratic commissioners,who are probably opposed to the deal, decide they want to try to get some conditions imposed on the deal or whether they simply want to vote against the deal. If they want to try to get conditions, the negotiations would take longer, but if they decide to simply oppose the deal, the negotiations could be done in a matter of weeks.

If DOJ Says No. If, on the other hand, the Department of Justice announces it will oppose the merger, the next step isto the courts, where the bottom line is that it is possible but unlikely the companies will prevail.

Sirius has said the companies would challenge such a decision. Although other companies sometimes have successfully challenged a DOJ or Federal Trade Commission 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 less likely here, where the companies must obtain clearance by the Federal Communications Commission, which we believe is most likely to follow the DOJ and reject the merger-related license transfers needed to close the deal.

Further, the FCC has a number of procedural moves it could take to undercut the ability of the companies to successfully challenge the government's decision. The FCC is not under any binding time clock, so it could sit on the decision for some time, during which the companies would feel internal pressure to move on with their separate existences. The Commission could designate the matter for a hearing before an administrative law judge, which could delay the matter even further. While such actions would not necessarily cause a court to delay its review of the DOJ complaint, it might cause some judges to view the case as not requiring expeditious treatment.

It is also possible that FCC Chairman Kevin Martin will conclude that the agency should postpone its consideration of the merger until after the court has ruled on the DOJ complaint. This would be the first time, to our knowledge, that a court ruled on a merger while the FCC decision was pending, but it is in the realm of possibility. For reasons explained below, it would probably be helpful for the companies, from a burden of proof perspective, if the FCC let the court proceed before ruling.

If the FCC acts quickly, it will also be uphill for XM-Sirius, in our opinion. In terms of the companies' challenge to the DOJ, the burden of proof is on the DOJ to prove the merger would be anti-competitive. We think this is a close call and a lot would depend on the predilections of the particular U.S. district judge reviewing the case. A lot would also depend on the judge's reading of the confidential business information that we have not seen. In challenging the FCC,however, the burden is on the companies to prove the merger is in the public interest. It's possible the companies could convince some judges that that is the case, but we think the obstacles would be significant. It is rare for the FCC to deny merger-related license transfers; it is even rarer for such a decision to be overturned in court, if it's happened at all.

We believe that if the DOJ rejects the deal, eventually in the litigation and regulatory process it is likely that the companies will weigh the considerable delay involved in pursuing further regulatory and court actions, as well as the difficult prospects of success, and eventually abandon this effort to merge the companies. We could see certain technological developments coming down the road (particularly Internet radio getting into cars through the mass adoption of mobile broadband) that could cause the companies to attempt a merger again at some point, but that prospect appears at least a few years away -- and if the DOJ rejects the deal, such developments were apparently too far into the future for this Department of Justice, which is supposed to look ahead only two years.

Tyler Savery Position - Long sirius, Long XM