- The Washington Times - Thursday, July 31, 2008

As the purchase of XM Satellite Radio by larger rival Sirius Satellite Radio Inc. closed Tuesday, questions remained over whether the combined company can handle its $3.4 billion in debt - including $1.1 billion due next year.

Also murky was how quickly the two companies can mesh their technologies without angering consumers.

Sirius said radios that can play programming from both companies will be on the market within nine months, but most are sold for cars, in before- or aftermarket installations, and automakers are notoriously slow to integrate new audio technology.

The nation’s only two satellite radio companies have combined as Sirius XM Radio Inc., based in New York, and will trade under the ticker symbol SIRI, which used to belong to Sirius. Mel Karmazin, the chief executive of Sirius, will take the same position at the new company.

Investors sold off Sirius shares this week, sending them to their lowest level in nearly five years.

“The new company is going to face a lot of hurdles, both operating as well as financing,” said Tuna Amobi, a Standard & Poor’s analyst in New York.

He was disappointed by Sirius’ accumulation of 280,000 net new subscribers for the second quarter, not as robust a figure as he had hoped for. Mr. Amobi is also concerned about higher interest payments.

Sirius’ $1.3 billion in debt hasn’t changed, but XM has taken on more debt and replaced some existing debt with other borrowing that carries much higher interest rates. XM has $2.1 billion in total debt, up from $1.7 billion at the end of March, according to company filings with the Securities and Exchange Commission.

Analysts had been counting on savings from the combination to offset higher debt costs, especially since neither company has ever made an operating profit.

While Sirius expects to save $400 million and post adjusted earnings before interest, taxes, depreciation and amortization of more than $300 million next year, its comments about free cash flow troubled analysts.

Sirius expects to post positive free cash flow in 2009, but only after excluding satellite capital expenses. That implies its free cash flow will be negative if satellite expenses are included, said Shilpa Parandekar, senior bond analyst at Moody’s Investors Service in New York.

She also noted that about $1.1 billion of debt is due in May 2009. Both companies’ credit ratings are under view for a possible downgrade.

“We felt the momentum was downward,” Ms. Parandekar said.

But David Frear, Sirius’ chief financial officer, said the combined company will have $70 million in additional interest payments, which the $400 million in savings can easily cover.

“You’ve got over $300 million left,” he said.

As for satellite expenses, Mr. Frear said these costs occur only once every 15 years or so.

As they waited 18 months for regulatory approval, the companies remained silent on many of the details of how they would combine their programming.

One known consumer benefit is the new ability to pay for only the channels one chooses, known as a la carte programming.

That service will require new or modified radios, and executives promised to sell such radios at retail within three months, but most new satellite radio customers don’t buy their radios at retail because they come pre-installed in automobiles.

The companies haven’t offered a timeline for automakers to install radios that allow a la carte programming, said Bob Williams of the Consumers Union, which opposed the merger.

“The [satellite radio] industry has a history of promising things and then letting it go by the wayside,” Mr. Williams said.

Mr. Frear said new subscription packages that include channels from both former rivals will be offered in the fall.

In the past, the companies have mentioned offering a “best of both” service for $17 a month - compared with the current price for one of the services at $13 a month. These plans will work with current radios. Customers will need new, interoperable radios only if they want the full lineup from both companies.

Sirius and XM haven’t disclosed which programming the best-of service will include. And there’s no guarantee that shock jock Howard Stern will be available to XM customers or that Sirius customers will get Major League Baseball games, for instance.

Combining all sports programming onto one network could prove difficult. For example, XM provides NHL coverage and Sirius coverage of the NBA. Because those seasons overlap and so many games are played every night, it may prove difficult to find bandwidth to broadcast every game.

Also, XM and Sirius never disclosed whether the contract with Mr. Stern, for example, would require higher payouts if more people can hear him.

So the new company’s costs could rise if it makes its top-tier talent accessible on both services.

Mr. Williams said such unanswered questions ought to compel the FCC to regulate the companies closely as it moves forward.

“It really calls for the FCC to not just sit on the sidelines,” he said. “We don’t have much reason to think they actually will get involved, but they really need to be on the case.”

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