Source : Globe & Mail

Sirius, XM stocks slide on FCC comments

Investors hoping to profit from a potential merger of North America's two satellite radio giants have been dealt a significant blow after U.S. regulators indicated yesterday that such a deal would likely be blocked.

The comments were the most definitive yet by U.S. authorities on a possible marriage of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc., sending their shares tumbling.

Speculation about an alliance has been rampant since last summer, with executives at both companies stating publicly that a deal would save billions in costs.

Such talk has sparked the struggling stocks of both U.S. companies at various times, while also lifting Canada's only publicly traded provider, Canadian Satellite Radio Holdings Inc., which operates the XM franchise in this country.

The merger hopes were doused yesterday when the chairman of the U.S. Federal Communications Commission said rules prevent XM and Sirius from combining.

"There is a prohibition on one entity owning both of these businesses," FCC chairman Kevin Martin told reporters in Washington.

Up until last week, the FCC had avoided saying how it would treat the matter. The companies have been competing fiercely -- signing celebrities such as Oprah Winfrey and Howard Stern to multimillion-dollar contracts to host radio shows -- and both are losing money. Analysts estimate they could save $7-billion (U.S.) by joining forces.

Sirius chief executive officer Mel Karmazin and XM chairman Gary Parsons stoked the speculation last week when Mr. Karmazin told an investor conference in Las Vegas that "consolidation creates value." Speaking to the same conference, Mr. Parsons said "clear synergies are likely there."

Shares in both companies rose in the days following those comments, and a smaller boost was seen with CSR's stock in Canada.

Following the regulator's comments, XM shares dropped 10 per cent, to $15.45, while Sirius fell 7 per cent, to $3.86. Both are traded on the Nasdaq Stock Market. The fallout was not as pronounced in Canada, where CSR dropped roughly 3 per cent to $7.13 (Canadian) on the Toronto Stock Exchange. Sirius Canada is not publicly traded.

The U.S. shares have been trading on merger speculation for months, but Genuity Capital Markets analyst Andrea Horan said the rumours had less of an impact in Canada. "It isn't evident to me that there is any significant merger speculation built into the share price of [CSR]."

There is a chance the FCC could defer the decision to the U.S. Department of Justice, but the ramifications of such a move aren't clear, particularly with the Bush administration set to leave office in 2008. Subsequent governments could be less receptive to such deals.

While observers believe a merger of XM and Sirius would bring immediate financial relief to the U.S. industry, the benefits in Canada would be smaller, analysts suggest. Since the cost of programming and satellite infrastructure are shouldered by the U.S. operations, the Canadian affiliates wouldn't see the same kind of savings. "It's not for sure that if the U.S. guys would have merged there would be any advantages for [CSR], given the model is different," said analyst Carl Bayard of Desjardins Securities.

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