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After 526 days, merge just the start for Sirius XM

NEW YORK (Reuters) - The new Sirius XM Radio Inc SIRI.O, which fought for 526 days or 17 months to get regulatory approval of the merger that formed it, faces a discordant reality.

A Sirius Satellite Radio unit is shown installed in a private vehicle in Washington February 20, 2007. REUTERS/Jason Reed

It’s bleeding money, subscriber growth has cooled, and it has to reintroduce itself to wallet-weary consumers who are already pinching pennies.

Analysts say shareholders may have to wait a long while to reap the benefits of the deal, which combines Sirius Satellite Radio and XM Satellite Radio to create a radio provider with over 18.5 million subscribers. The deal closed Tuesday.

“These stocks are still valued on multiples of revenue with no cash flow or profitability, facing losses and not showing top line growth as rapid as they have historically,” said Stanford Group analyst Frederick Moran. “One should be concerned about valuation absent the excitement of the merger closing.”

Shares of Sirius, which took over XM in a $3.3 billion deal, fell 15 percent to $1.60 on Nasdaq after it announced several acquisition-related financing moves, including a convertible issuance that would dilute its outstanding shares.

The completion of the merger, which makes Sirius the second-largest radio broadcaster after Clear Channel Communications Inc CCU.N, comes after a marathon period of government scrutiny that ended late last week, when the U.S. Federal Communications Commission approved the deal, which was first announced in February 2007.

“While the merger is beneficial for Sirius, we remain cautious as significant execution risk exists implementing synergies, and recognition of synergies is probably already priced into stock,” said RBC Capital Markets analyst David Bank in a note to clients.

Sirius expects to save about $400 million in 2009 and earn $300 million before interest and investment income, and before interest, depreciation and non-cash stock compensation expenses, otherwise known as adjusted EBITDA. Both savings and adjusted EBITDA should continue growing beyond 2009.

Combined, Sirius and XM posted losses of $1.2 billion in 2007. While each has seen losses narrow this year, analysts worry that it might be tough to get new consumers interested in satellite radio, which competes with everything from free traditional radio to digital music players like iPods.

“Much of our hesitation about the long-term profitability -- not viability -- of the satellite radio business model is derived from our view of the demand side of the equation,” said Goldman analyst Mark Weinkes, in a note to clients.

Specifically, he noted that 70 percent of Sirius’ gross subscriber additions in the second quarter were, in effect, replacements from subscribers who quit the service, which costs about $13 a month.

NEW PROGRAMMING, PRICES

Sirius and XM’s separate services, and their existing radios, will continue to work and every subscriber has the option of maintaining their current service package.

In a few months, subscribers will have the option to access some programming from the other network, as well as packages of stations like “Mostly Music.” They will have to wait longer for an “interoperable” radio that receives all of the talent from both systems, or full “a la carte” service.

Sirius is counting on new pricing packages, new programming

choices and growth in automotive subscribers to spur demand, now that the company is free of the restraints of the merger process.

Some analysts suggest that, as with flat panel televisions, consumers appear to be willing to pay for technology they adore, no matter how bad the economy seems.

“Sirius’s preannouncement of solid second quarter results, combined with XM’s strong results that were announced last week, suggest that the fundamentals of the business are holding up well despite the weak macroeconomic backdrop,” Citigroup analyst Tony Wible wrote in a note.

XM last week said its second quarter net loss narrowed to $120 million, beating analysts’ estimates, as subscribers increased and costs declined. Sirius on Monday said its adjusted loss also narrowed.

The new Sirius XM will boast a roster of exclusive programming, ranging from channels dedicated to personalities such as Howard Stern, Oprah Winfrey and Martha Stewart to professional sports broadcasts, news and music.

Sirius acknowledges that it will take time to integrate the two operations but expects new services to appear within three months, in time to appeal to holiday shoppers.

“By offering more compelling packages and the best content in audio entertainment, we are well positioned for increased subscriber growth,” Mel Karmazin, CEO of Sirius XM Radio said in a statement. “We also believe that the completion of the merger will eliminate any confusion that has been lingering in the marketplace.”

Sirius XM’s corporate headquarters will be in New York. XM Satellite Radio, the company’s new wholly-owned subsidiary, will remain in Washington.

Reporting by Franklin Paul; Editing by Gerald E. McCormick

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