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WSJ: Sirius/XM Merger Deal Struck

7/23/2008 04:35:00 PM Eastern

Washington — Following reports that the Federal Communications Commission (FCC) would soon approve the Sirius/XM merger, the National Association of Broadcasters, (NAB) issued a report excoriating the decision.

NAB executive VP Dennis Wharton called it a “sweetheart deal for Wall Street speculators,” and said the satellite radio companies have “had more luck flaunting the FCC's own rules than creating a successful business model.”

When asked if the NAB would appeal the expected FCC decision, Wharton said, “All I can say is that we will explore all of our options.”

Reports from the Wall Street Journal and other news agencies said Commissioner Deborah Taylor Tate will cast the deciding vote in favor of the merger under the proviso that the merged company pay a $20 million fine for alleged past violations of FCC rules and possibly other considerations.

An FCC staffer told TWICE that Tate “will vote” but did not say when or how she will vote.

Sirius and XM would not confirm the reports but Sirius said its attorney met with Tate to “discuss matters pending before the Enforcement Bureau,” according to a filing with FCC dated July 21.

XM and Sirius have been cited in the past for violations regarding placement of their repeaters and regarding radios that exceeded power requirements. The NAB claimed that Sirius and XM also violated an FCC mandate that they develop interoperable radios that can receive both services. The satellite radio companies claim they developed the radio but did not market it as it was too costly.

Sirius and XM have already promised the FCC they will cap prices for three years and allow open-sourced radios. They have also promised to offer new a la carte radios starting at a $6.99 monthly fee within three months of merger approval, and they will enable existing radios to offer full XM plus some Sirius or full Sirius plus some XM programming for $16.99 within three months. They also promised to devote 8 percent of spectrum for educational and leased programming and said that dual interoperable radios that let users select either full XM or full Sirius service will be sold at retail within a year of merger approval.

XM must also restructure $500 million in debt, after already restructuring $600 million in debt for the merger to be completed, said an analyst. Many of XM’s bonds include “change of control” provisions that would be triggered by a merger, and so the bonds must be refinanced or repurchased.

“They have to deal with the fact that if they don’t refinance those notes, they are going to have to come up with a substantial amount of cash. I think in all practicality, they really need to have agreements with bondholders before they close the deal,” said RBC Capital Markets analyst David Bank.

Bank believes the debt will be fully restructured shortly. He said bond holders wait until the last minute to negotiate for the best terms, but they’ll settle because a merger is in their best interests. “So it’s a bit of a game of chicken,” he said.

This morning the Wall Street Journal reported that under FCC conditions, XM will be required to pay $17.5 million in fines, and Sirius about $2 million, because their radio transmitters exceeded FCC power limits and they placed repeaters in unapproved locations. The article also noted that if the FCC approves the deal imminently, it would give the merged satellite radio company enough time to deliver a la carte radios by Christmas.