Satellite Radio Hands Out Appetizers

Critics of the merger between XM Satellite Radio (Nasdaq: XMSR  ) and Sirius Satellite Radio (Nasdaq: SIRI  ) will have one less bullet in their holster when the companies file with the FCC today.

With pundits fearing that the two entities will raise subscription rates as a single concern, the companies are willing to put their promise of lower-priced plans on paper. In their filing, XM and Sirius are vowing to honor the $12.95 monthly subscription plans that they currently offer and are introducing several lower-priced plans that can run satellite-radio fans as little as $6.99 a month.

The $6.99 plan will let listeners cherry-pick their 50 favorite non-premium channels, but they must all be on either XM or Sirius. A pricier $14.99 a la carte plan that offers 100-non-premium channels will allow for a little cross-programming flexibility. The bargain-priced offering will be available within a year of the merger's completion.

That's right, jazz lovers -- you won't have to deal with death metal on your dial. And country fans won't have to worry about raising their eyebrows over hip-hop. 

Other plans will be available sooner, including Family Friendly subscriptions for $11.95 a month that encompass 160 of the roughly 180 XM available channels that censor explicit language, or $9.99 plans that feature either music or news.

The priciest $16.99 XM plan, meanwhile, will offer all of XM's channels, along with the most popular Sirius selections. Clearly, those rallying against the merger can no longer argue that a corporate combination will be more expensive for the consumer or limit selection.

Anatomy of a deal
The proposed pairing has been on the hopper for more than five months now. It was back in February when XM agreed to merge with Sirius in a deal that valued the combined companies at $13 billion in enterprise value.

The market hasn't been kind to either stock since then. The combined enterprise value of the deal is now less than $11 billion, and investors still feel iffy about the chances for a successful resolution, with XM trading at a 15% discount to the 4.6 Sirius share ratio.

Even the bulls are unsure. Waxing favorably on the sector last week, Bank of America analyst Jason Jacoby said he expects both XM and Sirius to beat their subscriber targets. However, that enthusiasm is tempered by his Washington, D.C., sources who peg the likelihood of FCC approval at a grim 35%.

Maybe this morning's filing changes things. I have poked fun at the companies' lobbying efforts, which have included getting church groups, tax-code reformers, and even a former FCC commissioner to publicly support the deal.

"I don't know about you," I wrote at the time, "but nothing inspires me more than knowing that folks bent on reforming our country's tax code think it's a good thing to have Oprah Winfrey and Howard Stern on the same satellite radio dial."  

I don't put a whole lot of weight on the eclectic cross-section of deal-backers who are lobbying on behalf of XM and Sirius, but today's filing is a real eye-opener. Critics should be swayed by the obvious signs that this isn't a duopoly.

  • Apple (Nasdaq: AAPL  ) has sold more than 100 million iPods, and many new cars are coming installed with iPod jacks.
  • Slacker and its ad-supported media player will come with a car kit for satellite functionality.
  • HD Radio that splits bands provides greater music choices on terrestrial frequencies.
  • Music-subscription services such as Napster (Nasdaq: NAPS  ) and RealNetworks' (Nasdaq: RNWK  ) Rhapsody are growing their digital-music audiences with portable offerings.
  • Internet radio, despite recent royalty concerns, is becoming more popular with wider Wi-Fi accessibility.

However, if the anti-merger crowd can't see the wider playing field that radio programming is playing on, the FCC filing poses fewer obstacles.

XM on deck
No, it's not a done deal. The arbs aren't ready to short 4.6 shares of Sirius for every share of XM; they're long to play the fat spread as an arbitrage play. However, if Jacoby is right about XM's coming up strong later this week, it could be a win-win in which XM can climb higher on its own.

Naturally, Jacoby's bullish sentiments were based on subscriber targets rather than on financial metrics. No one is expecting XM -- or Sirius -- to provide financial treats. And we can even argue that the lower-priced plans that XM and Sirius are volleying about may be detrimental in many ways:

  • Potential owners may hold off until the cheaper plans are announced, and they could become resentful if they aren't offered these plans even if the merger doesn't happen.
  • The $6.99 plan with 50 stations may eat away at XM Radio Mobile's offerings. Alltel (NYSE: AT  ) subscribers are now paying $7.99 monthly for 20 XM music channels through their cell phones, while AT&T's (NYSE: T  ) Cingular offers 25 channels for $8.99 a month.  
  • Because growth has stalled at the retail level, the new-car market is now the source for most new listeners. With many receivers coming factory-installed, cheaper plans may cannibalize full-priced offerings.

I'm sure XM and Sirius have thought out the ramifications of publicly committing to econo-sized subscriptions. The economies of scale are too great for the deal to falter, especially coming from a pair of companies that have accumulated deficits into the billions under their old models.

So maybe this deal has a chance. Think it over, cynics. The last thing you would want is to pull the trigger on your argument-loaded gun, only to find that it's got nothing but blanks.

Rick recommended XM toRule Breakers subscribers in 2005, but the position was liquidated last year. A 30-day free trial subscription is available if you want to read up on the active recommendations.

Bank of America is an Income Investor pick.

Longtime Fool contributor Rick Munarriz is a Sirius and XM subscriber, but he does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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