Merger of Sirius and XM redraws the radio landscape.

The proposed merger between Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. might affect investors more than radio listeners in the Los Angeles market.

According to a 2006 report from Scarborough Research, only 4.2 percent of adults listen to either XM or Sirius in a typical week. Mary Beth Garber, president of the Southern California Broadcasters Association, added that on a weekly basis, less than 1 percent of local radio listening happens via satellite.

"The merger won't have any more impact than satellite radio has had so far," Garber said. "Basically it has been less than a blip here."

But in a note the day after the merger announcement on Feb. 19, analyst Anthony DiClemente at Lehman Bros. Holdings Inc. wrote that the "implications of a merger between XM and Sirius are modestly negative for our terrestrial radio broadcasters." He noted that nationally, regular radio listening has dropped 3 percent during the past three years. Meanwhile another analyst at Lehman Bros. estimates satellite subscriptions will grow 30 percent this year to reach 18 million.

"In the near term, the deal is likely to prove competition for investor dollars, and we expect pure-play terrestrial radio stocks to be impacted negatively by the merger news," according to DiClemente. He estimated radio stocks are currently 15 to 20 percent overvalued, singling out Emmis Communications Corp., owner of local stations KMVN-FM (93.9) and KPWR-FM (105.9).

The merger would create a single satellite radio provider with combined 2006 revenues of approximately $1.5 billion. The new company would be half owned by Sirius shareholders and half by XM shareholders. Mel Karmazin, currently chief executive officer of Sirius, will assume the same title at the new company.

"The combined company will be better capitalized to compete in the evolving audio media marketplace and will be able to better focus on providing a compelling product to consumers instead of battling for market share," according to analyst Laraine Mancini at Merrill Lynch & Co. Inc. She expects fierce competition not only from standard radio, but also from Internet radio and iPods, both of which could move onto automobile dashboards in the next few years. Satellite radio gets about 80 percent of its subscribers through the auto market, thanks to carmakers that build receivers into new models. Both General Motors Corp. and American Honda Motor Co. Inc. will have representatives on the board of the combined XM-Sirius.

Financially, the companies' most recent filings show Sirius with a quarterly negative cash flow of $163 million, based on revenues from 5.1 million subscribers. XM reported a loss of $85 million with 7.2 million subscribers. Both companies charge a monthly subscription fee of $12.95.

Advertising doesn't count for much in the satellite universe. The two-company total for annual ad revenues in 2005, the last full year of available data, amounted to $26 million, a pittance compared to the $1 billion spent on terrestrial radio in the L.A. market alone that same year.

Sirius maintains a total of 133 program channels, while XM has 170 channels. Mancini at Merrill Lynch expects the combined company to cut their losses by a reduction in duplicate programming costs.

JOEL RUSSELL

Staff Reporter