LOS ANGELES (Hollywood Reporter) - Sirius Satellite Radio CEO Mel Karmazin has more than just a stalled merger with XM Satellite on his mind. He’s also wondering what it’s going to cost to keep his star talker, Howard Stern, on board.
“Great content costs money,” Karmazin reminded analysts Tuesday during a conference call to discuss quarterly earnings.
“If Howard is on the call and listening, if he would like to extend his deal at less money, we would be interested in that,” Karmazin told the analysts. “But from my history with him, I don’t think that is apt to happen.”
Stern costs Sirius $500 million for five years, and he’s in his third year already. Add to that the billions Sirius spent on rights to the NFL, NBA, NASCAR and other content, not to mention the building and launching of expensive satellites, and its easy to see why Sirius wants so desperately to merge with XM, though regulators have yet to approve that plan.
In fact, the termination date for the merger deal is Saturday, though Karmazin said Tuesday that he expects the boards of both companies to meet before then to extend the deadline. XM will no doubt update analysts Thursday when it reports financial results.
Karmazin was once optimistic that the merger would be complete at the end of 2007, even while referring to it on occasion as “an uphill battle.”
Not only has Karmazin’s timetable been thrashed, but the one-year anniversary of the deal struck on February 19, 2007, also has passed, a significant milestone given that more than 200 mergers have been completed since then, each taking an average 110 days to complete.
Still, the bureaucrats aren’t in any hurry. In fact, 10 months into the process, Rep. John Conyers, D-Mich., the chairman of the House Judiciary Committee, asked the Justice Department not to “rush through” an approval, if there is to be one.
“We wait by our telephone,” Karmazin said Tuesday. “But we really have not heard anything from them. It has been more radio silence than anything else.”
Even if the DOJ approves, the Federal Communications Commission must also bless the merger.
Karmazin also said that confusion about the merger among consumers is having a negative impact on retail sales, though Sirius posted better-than-expected quarterly results Tuesday.
The company added 654,000 new subscribers to 8.3 million on its way to losing $166.2 million, compared with a loss of $245.6 million in the year-ago quarter. Revenue rose 29% to $249.8 million.
Sirius posted a full-year net loss of $565.3 million; the year earlier it lost $1.1 billion. Sirius and XM together have burned through billions in the past decade, and merging the companies, by some estimates, would save them an equal amount over the next several years.
Many observers seem to think there’s not much of a reason to reject the planned merger, though that hasn’t stopped Wall Street from hammering the stock prices as if deal approval were a long shot.
Since February 20, 2007, Sirius shares have fallen 22% to $3.05, while XM shares have sunk 15% to $13.13.
Regulators presumably have been considering for more than a year now the question of whether a merger of the only two satellite radio firms in the nation would constitute a monopoly that would harm consumers.
But most observers seem to have come to the conclusion long ago that the answer is no, considering that sat radio is used mostly in vehicles where competing devices like free radio, iPod docks and CD players are also options, as are DVD players. Soon, the Internet and satellite television will become mainstream attractions in cars, as well.
Anyone blocking the deal on the grounds that merging the two companies would stifle competition “may as well lay on the ground and become fossil fuel for that kind of dinosaur thinking,” Motley Fool senior analyst Rick Munarriz said.
Munarriz, like others, worries that two competing satellite radio services can’t survive. If they don’t merge, Munarriz predicts, “one or the other will fail, and that will give the victor the monopoly it wanted.”
Munarriz suggests that investors buy shares of XM and Sirius because the stocks will pop when the merger is approved. “Obviously it’s a gamble to get in at this point, but the uncertainty is also discounting the shares,” he said.
Steve Birenberg of Northlake Capital also advises buying the stocks, but he says to sell them once the deal is approved and buyers rush in.
“I don’t think that satellite radio will ever be the pervasive technology for in-car entertainment based on the current subscription model,” he said.
One particularly bearish analyst, Mark Wienkes, said recently that it is “increasingly unlikely” that regulators will block the deal, though he wouldn’t buy either stock, merger or no merger.
“Our outlook for satellite radio is cautious given our view of unrealistic cash flow expectations,” he said.
Karmazin touted several positive outcomes if the merger were approved, including a la carte programming and cheaper prices for consumers. Plus, the company and its shareholders will benefit from increased advertising revenue.
Sirius only sells about $35 million a year in ads, an anemic amount considering it features dozens of channels with advertising, including two with Howard Stern.
“We ought to be doing a better job in selling Howard,” Karmazin said Tuesday.