DoJ Widens Review of XM-Sirius Merger with 2nd Request

DoJ asked XM and Sirius for more on their proposed merger in a 2nd information request, the companies said in filings to the SEC. DoJ and FCC likely will query competitors, vendors, advertisers and customers, too, sources said. Meanwhile, NAB again released data to back a demand that regulators reject the merger as anticompetitive.

Second information requests often arise in regard to large, complex mergers, especially those facing vigorous opposition and close Capitol Hill scrutiny. Agencies commonly issue 2nd requests when initial review raises antitrust concerns.

Sirius and XM will “respond expeditiously” to DoJ’s 2nd request for information and “documentary material,” the firms said in separate 8-K filings at the SEC. A 2nd request extends the waiting period 30 days after Sirius and XM fully comply, they said.

“All it means is that [DoJ officials are] taking a look at it, but for a merger like this you don’t need to know that there’s a 2nd request to know that the department would be taking a careful look,” an attorney familiar with antitrust issues said: “These are very routine in investigations where they're taking a close look.” A main target will be the companies’ marketing plans, the source said: “If Sirius is only looking at XM and setting prices based on XM and vice versa that’s going to be very strong evidence that the market… is two satellite carriers.” If their plans focus more on iPod prices or commercial radio programs’ success, the evidence would cut the other way, the source said.

“I'm not surprised at all because in mergers of this scale and complexity you would expect regulators to come back seeking more information,” said a lawyer following satellite issues: “I'd be more surprised if there wasn’t a 2nd request.”

“While this request for additional information was expected, the DOJ/FTC exercise significant restraint in issuing 2nd requests,” a Bear Stearns research note said, pointing out that during 1998-2005 the agencies made 2nd information requests in fewer than 5% of the proposed mergers they reviewed. However, 2nd requests often are linked with enforcement action, Bear Stearns said: “From 1998 to 2005, the annual percentage of 2nd request investigations by the FTC that resulted in some type of enforcement action (that includes transactions that resulted in consent decree or restructuring as well as a very small percentage that were challenged) ranged from 44% to 78%.”

Widely expected ,the agencies’ 2nd request of XM and Sirius won’t affect how the street views of the deal’s chances of approval -- which are viewed skeptically, Tom Burnett, dir. of research at Wall Street Access, said: “The market has a healthy fear of the regulatory barriers. Most of the people we talk to don’t give it more than a 50-55% probability of success. People aren’t trading [the companies’ stocks] because they don’t know how to handicap something that is so political and regulatory.”

DoJ may well seek input from customers and competitors of XM and Sirius, a telecom source said. “The Department is able to keep the record sealed and confidential in a way that the FCC can’t,” the source said: “They can interview persons, companies, who would be affected by the merger to get their views as to whether or not the merger will hurt competition. It’s not hard to find competitors who are willing to come in and complain about the competitive effects. Going to customers who may not be motivated to come in and complain is something the Justice Dept. routinely does.”

Advertisers will be high on DoJ’s interview list, said a lawyer active on satellite issues. “They'll ask how advisers feel about the combination… in so far as those two services have advertising,” the attorney said: “They'll also look at vendors, to see what their point of view is… What they're trying to figure out is there enough of a problem that they would feel comfortable that they could bring a case to stop a merger.”

Letting XM and Sirius merge would hurt competition across key markets, said Fordham U. assoc. prof. Philip Napoli. He wrote a report released by NAB and sent to the Hill, where the merger has been the topic of multiple hearings. In his study of the deal’s impact in the upstream and downstream content markets, as well as the audience market, Napoli found risks at many levels.

In the upstream market “both Sirius and XM are vertically integrated, in that they produce some of the programming they distribute,” Napoli said, noting that both draw on many independent programming sources. But he warned that the key issue in regard to content is “the extent to which it would result in a monopsony -- a market in which there is a single buyer and multiple sellers. Such a scenario gives the buyer tremendous leverage over the sellers and undermines the efficient operation of the market.”

Downstream, the market should be defined narrowly, he said. This is because: “1. The geographic context at issue needs to be limited to those services that are mobile. 2. The programming on satellite radio is fundamentally different in a number of important ways from programming available by other mobile audio content providers. 3. Research finds consumer adoption patterns indicating complementarity rather than substitutability between satellite radio and other mobile audio services.”

Napoli sees more competition in the audience market, he said, juxtaposing terrestrial radio’s reliance on local ad dollars with satellite radio’s subscription revenues, which underwrite its key selling point of ad-free channels.

NAB also released a letter by former CTC Chmn. James Miller opposing the merger. “This is a two-down-to-one merger. There are no other providers in the market,” Miller wrote.