Any time public and/or private companies merge there are a number of approvals that may be required. Those approvals could include company boards, shareholder votes, Federal Trade Commission (FTC), Department of Justice (DOJ), and in some cases, other government regulatory agencies. In the case of a potential acquisition of SiriusXM (SIRI) by Liberty Media (LMCA), Federal Communications Commission (FCC) approval would also be required.
A Brief History of Sirius and XM Merger
Many long term investors in SiriusXM are all too familiar with the problems caused by the delays in shepherding the merger of Sirius and XM through this approval process. As the process dragged on for a year and a half, the companies' finances deteriorated and credit became more difficult to obtain. Many investors point to the FCC as the culprit for the delay. and in part that is correct. However, most selectively forget that the DOJ took more than a year (until March 8, 2008) to approve the merger.
The merger was eventually also approved by the FCC, after the companies agreed to a set of conditions that included a 3 year price freeze, non-exclusive manufacturing, providing a la carte, "family friendly" "and Best Of" pricing options, setting aside 4 percent of its full-time audio channels for noncommercial educational and informational programming, leasing another 4 percent of its channels to "qualified entities," etc.
Because the FCC approval process was complex and lengthy for the merger of Sirius and XM, some investors fearful of a takeover by Liberty, are hoping or assuming that the FCC will take a long time to approve a takeover by Liberty. There is a belief that SiriusXM can somehow prevent Liberty from getting approval, or throw up roadblocks. There is little in the history of the Sirius and XM merger to suggest any attempts by SiriusXM will be successful.
Additional History
When Sirius and XM were granted FCC licenses there was a concern over an eventual merger. The concern was so great that a monopoly would limit competition in the SDARS space, that a regulation prohibited the transfer of the licenses from one to the other. In the FCC review that eventually allowed the combination, the FCC noted:
Based on the record before us, we conclude that the proposed transfer of control would violate our rule against one licensee controlling both SDARS licenses. We also conclude that, absent Applicants' voluntary commitments and other conditions discussed below, the proposed transaction would increase the likelihood of harms to competition and diversity. As discussed below, assuming a satellite radio product market, Applicants would have the incentive and ability to raise prices for an extended period of time. This is more likely given the spectrum and cost barriers which prevent entry by new SDARS providers that could offer consumers an alternative outlet for satellite radio service. In particular, additional spectrum is not available at this time without spectrum divestiture, which we have determined is inappropriate in light of the considerable financial investment needed to successfully operate an SDARS service, as well as the technical complications that might result from such divestiture. Additionally, the regulatory and other business aspects involved in the start-up of such a cost-intensive operation make effective competitive entry unlikely within any relevant time horizon.
... On June 25, 2007, the Commission adopted the 2007 SDARS NPRM, seeking public comment as to whether language included in the 1997 SDARS Service Rules Order establishing SDARS service, which prohibits the transfer of control of one SDARS licensee to the other, constitutes a binding rule. In the event the Commission was to determine that the language in the 1997 SDARS Service Rules Order is a binding rule, the 2007 SDARS NPRM sought comment on whether the Commission should waive, modify, or repeal the transfer prohibition if the Commission subsequently determined that the proposed merger of XM and Sirius, on balance, serves the public interest.
The FCC also noted that "Under these worst-case assumptions, therefore, the proposed merger is a merger to monopoly." Obviously, the FCC eventually decided that there were enough consumer protections so that a merger would, "on balance," serve the public interest. The FCC rendered its decision in late July 2008, four and a half months after the DOJ approval.
Price Freeze Lifted in 2011
The "voluntary commitment" to freeze prices was to be revisited six months before the end of the three year period. Regarding its decision to allow the freeze to expire, the FCC made the following comments.
The record before us now does not support extending the price cap condition. Indeed, as discussed below, there is evidence that new competitive alternatives have arisen since 2008.
... Although our decision rests on the lack of evidence to support extending the price cap, we note that the marketplace has evolved since the merger closed, and consumers now have additional audio entertainment choices.
... Indeed, it appears that since the Merger Order new audio services have emerged as viable consumer alternatives, including smartphone Internet streaming applications that can be used in mobile environments such as automobiles equipped with user-friendly interfaces. For example, Pandora Media Inc. ("Pandora"), which provides audio services via Internet streaming and smartphone apps, has demonstrated remarkable growth in popularity in the years since the merger. Other examples of apps that have emerged as alternatives since the Merger Order include Rhapsody, Slacker, Last.fm, and iheartradio. Ford, Toyota, MINI, GM, Mercedes-Benz, and Hyundai are introducing Internet-based streaming services in their vehicles. In addition, data suggest that HD radio has increased since the merger.
... Accordingly, for the reasons set forth above, we find on this record that the evidence does not support at this time the extension of the price cap beyond the period the Commission imposed in the Merger Order and the condition will therefore expire on July 28, 2011.
Despite recognizing that the SiriusXM merger created a monopoly, the FCC decided that Pandora (P) and other Internet radio applications provided viable alternatives. Furthermore, the integration of Internet-based streaming services in Ford, GM, Toyota and other vehicles increased the competitive situation.
The FCC View of Liberty Media
While the lengthy review process of the Sirius and XM merger was taking place, Liberty was under review as well. The FCC was looking at the transfer of News Corporation's 40.36% interest in DIRECTV (DTV) to Liberty. There were several significant issues addressed in the FCC decision. These included
- Reduced competition in Puerto Rico where Liberty also had cable operations. The concern was that with Liberty controlling DIRECTV in addition to its cable interests, competition would be greatly reduced (EchoStar was viewed as a much weaker competitor) and consumers were likely to experience lessened price competition.
- Liberty's interests in both content and distribution could restrict availability of exclusive content to non-Liberty-affiliated distributors. This would include the ownership of three Regional Sports Networks included the News Corporation transaction.
These issues were addressed and de facto control of the licenses to Liberty was approved by the FCC.
Summary
John Malone and Liberty were eventually approved by the FCC and there is little reason to expect that they will not be approved should they take a majority position in SiriusXM. Ownership of SiriusXM would create very few, if any, conflicts of the type encountered with DIRECTV.
While SiriusXM is a monopoly, the FCC has more recently ruled (when it allowed the price freeze to expire) that it has limited pricing power due to the availability of viable alternatives. Having Liberty move from 40% to 46.2% to majority ownership of SiriusXM is not going to alter that pricing power. Similar arguments can be made about vertical integration. SiriusXM already has some unique content, and changing ownership won't make that content or distribution method more, or less, desirable.
The FCC will almost certainly maintain any previously agreed to restrictions imposed by the Sirius and XM merger, but it would seem unlikely that any significant new restrictions would be imposed before permitting a Liberty takeover. SiriusXM investors hoping that the FCC approval process would provide SiriusXM with bargaining power to negotiate more favorable terms for the non-Liberty shareholders may wish to reconsider that position.
There are valid reasons to invest in SiriusXM. The potential difficulty of the FCC approval process just should not be one of them.
Disclosure: I am long SIRI. I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time. I have no positions, or any plans to open positions in the next 72 hours, in any of the other companies mentioned in this article.
