Deal delay may hurt Sirius, XM holiday sales

A woman walks past the waiting area of the XM Satellite Radio in Washington, March 25, 2008.

NEW YORK (Reuters) - It's barely spring, but Sirius Satellite Radio Inc's (SIRI.O) unfinished merger with XM Satellite Radio Holdings Inc XMSR.O may already be hurting their holiday-season subscriber push, possibly delaying some benefits of the deal deep into 2009.

Should Sirius's $3.5 billion all-stock acquisition be cleared by the Federal Communications Commission -- its last regulatory hurdle following the Department of Justice's approval last month -- the merged company would have to aggressively cut costs and integrate operations.

The speed and timing of a turnaround is key, since both companies typically score their biggest subscriber gains in the winter holiday season, when consumers buy the services as gifts.

But with no clear date for the FCC decision, integration plans that have been on hold for more than a year, since the deal was announced, could miss key milestones in 2008.

"No matter how quickly they get it done, if they miss this fourth quarter, they will miss one year of opportunity," said Rob Enderle, principal analyst for the Enderle Group. "So getting this cooked fast -- at least from the standpoint of the perception to the buyer -- would be critical."

For example, company staffers would need time to map out a plan for mass-producing a radio, at a manageable cost, that receives live content from both services. Sirius Chief Executive Mel Karmazin has said such a radio exists, but there have been few details on its consumer availability.

In the meantime, a combined company would need to prevent confusion among subscribers as it keeps two different services alive. Financially, Sirius would have to address refinancing some $1 billion in XM debt amid a U.S. credit crunch.

"Unless they do something superhuman, their biggest shot ... is late third quarter 2009 -- the back to school season. That's a long time to wait for ramp," Enderle said.

Subscribers will have to wait many months to see one of the most exciting benefits of the merger, a single service on a single radio combining XM talent like Oprah Winfrey with Sirius celebrities like shock jock Howard Stern.

The combined company, to be led by Karmazin, would -- six months after the deals closing -- offer subscribers greater choice with tiered programming, such as a "mostly music" package, for less than the current monthly rate of $12.95, which covers music, talk and sports offerings. Full "a la carte" service won't be ready until a year after the close.

And as the U.S. economy weakens, a joint XM and Sirius could find it harder to convince subscribers why anyone should pay for radio in the first place.

RETAIL INTEREST HAS SLOWED

Interest in pay-radio has cooled in the 14 months since their deal was announced, as both XM and Sirius have muted their marketing push while lobbying regulators to approve the deal.

In the interim, the market for portable entertainment gadgets has become more crowded, with Apple Inc's (AAPL.O) new iPods and iPhone, and millions of music-playing cell phones.

As rivals, XM and Sirius routinely used the Consumer Electronics Show in Las Vegas every January to upstage one another, announcing ever-smaller portable players and chips aimed at making satellite radio ubiquitous.

At this year's CES, both were nearly silent.

"They haven't had a new innovative product in a while," said Stanford Group analyst Frederick Moran. "Stiletto (from Sirius) and Inno (from XM) were expected to drive retail, but didn't really make a splash."

Some experts suggest that time spent lobbying Washington lawmakers could have also been devoted to wowing consumers with new models, fresh on-air talent or beefed-up services.

"Its a tough road ahead," Moran said. "The stocks are supported by the expectation that (the deal) will go through, and redundant costs will be removed (in the) billions over the next few years. With auto manufacturers facing their own slumping growth, it may be tough to grab subscribers."

Finding costs to cut would be the top priority after completion of the merger for XM and Sirius, who together posted losses of more than $1.2 billion in 2007. Goldman Sachs analyst Mark Wienkes says there are up to $7 billion in potential savings synergies, but still rates Sirius shares at "sell."

A bright spot for both companies has been the roll-out of more cars built with satellite radios. While car sales may be anemic, proportionally more vehicles are being built with satellite radio as partners like Nissan Motor Co Ltd (7201.T) and Hyundai Motor Co (005380.KS) ramp up production.

Those cars, however, might not be able to access premium programs of both services after a merger. For example, an XM radio would still be able to hear live Major League Baseball games, but a user with a Sirius radio might not. The Sirius radio owner, on the other hand, would still be able to hear National Football League games but might not be able to receive baseball games. Many might have to buy new radios to get the biggest benefit from a merger.

Analysts suggest the FCC's decision could come any day. An approval would likely involve a change of the rules on satellite radio licensing ownership, which currently prohibit one entity from owning both licenses. FCC Chairman Kevin Martin has said the rule could be altered, if requested.

Sirius and XM may have already lost the ear of some shareholders, who may have lost faith in satellite radio as an alternative to iPods and other devices.

Sirius shares this week fell to a 3-1/2-year low of $2.37, down 35 percent from the closing price on the day before the deal was announced. XM shares, at $10.64 on Nasdaq on Thursday, are down nearly 25 percent.

(Editing by Gerald E. McCormick and Braden Reddall)