A week after the unveiling of the proposed merger of Sirius Satellite Radio and XM Satellite Radio, consensus about its prospects and possibilities remained muddled as federal officials prepare to consider the application.

XM and Sirius announced Feb. 19 a definitive agreement under which the companies would combine in a tax-free, all-stock merger of equals with a combined enterprise value of approximately $13 billion, including net debt of approximately $1.6 billion.

Under the terms of the agreement, XM shareholders would receive a fixed exchange ratio of 4.6 shares of Sirius common stock per each share of XM they own. XM and Sirius shareholders would each own about 50 percent of the combined company.

Gary Parsons, chairman of XM, would be chairman of the new satellite radio company, while Mel Karmazin, CEO of Sirius, would become CEO.

Pending regulatory approval, the companies expect the transaction to be completed by the end of 2007. The transaction is subject to approval by both companies’ shareholders, which should be the easiest part. The real stumbling block for the two satellite radio operators will be satisfying antitrust agencies and the U.S. Federal Communications Commission (FCC). The odds of the deal’s passing muster with the U.S. Department of Justice and the FCC have been commonly described as 50-50 or worse.

FCC Chairman Kevin Martin previously said a merger would face "high" hurdles before gaining approval. A decade ago, the commission granted Sirius and XM their operating licenses on the condition that the licenses would not eventually be owned by the same company.

Parsons told investors in a Feb. 20 conference call that "satellite radio is still a small player," and that "XM and Sirius are competing for consumers’ attention and entertainment dollars from multiple products and services in the highly competitive and rapidly evolving audio entertainment marketplace."

Though the companies currently have a combined 14 million customers, over the past eight years Sirius and XM combined have lost an estimated $7 billion, and company officials claim not to see a way to profitability.

Such claims are offset by critics who question the broadcasters’ business practices. In 2004, Sirius famously signed Howard Stern to a five-year, $500 million deal.

In a statement, National Association of Broadcasters Executive Vice President Dennis Wharton said "when the FCC authorized satellite radio, it specifically found that the public would be served best by two competitive nationwide systems. Now, with their stock prices at rock bottom and their business model in disarray because of profligate spending practices, they seek a government bail-out to avoid competing in the marketplace."

The Antitrust Task Force, a new subcommittee of the U.S. House of Representatives Committee on the Judiciary, has called for a Feb. 28 hearing, "Competition and the future of Digital Music," at which Karmazin will testify with other witnesses.

"Digital music is at the cutting edge of technology and innovation," Rep. John Conyers (D-Mich.), chairman of the subcommittee, said in a statement. "We are holding this hearing to allow members to probe whether this merger will enhance or diminish competition in the digital music distribution industry. Our members will explore how to define this new marketplace, and whether this merger will lead to increased choices and lower prices for consumers."

Rep. Lamar Smith (R-Texas), the top-ranking Republican committee member, said the hearing "will help determine whether customers will get higher or lower prices and more or fewer programming options with the proposed merger. In particular, the committee will examine whether satellite radio competes against terrestrial radio, the Internet, or other emerging technologies."

XM and Sirius essentially offer two services: radio programming and its delivery via satellites and ground stations.

Both Karmazin and Parsons agreed that the respective constellations of the companies would not be affected anytime soon.

XM’s latest stellite, XM-4, was placed into orbit in October, giving the company a pair of second-generation satellites that are expected to provide service for at least 15 years. Karmazin said Sirius-5 is scheduled to be launched in 2008, and said "this [merger] will not in any way alter that — not that it would be a bad idea if we could, but we both agree in honoring agreements and [original equipment manufacturing] agreements."

Parsons added "the pure and simple fact is that it’s not like turning off one satellite for another. You have millions of listeners and subscribers, each with a radio relying on one or the other’s satellite, and they’re not easily replaceable. No one looking at it will consider those possibilities. … We each have constellations that we’re expecting to be operational for the next 15 years and millions of subscribers who rely on that. It’s simply not feasible to eliminate one of those platforms."

Industry analyst Marco Caceres of Teal Group reflected ambivalence over the deal. "Clearly, if they’ve made bad decisions and fail to make a profit, it’s good for the industry that they stay in business, [though] for the customer, it may not be good."

From the investment side, "yes, it’s a monopoly," he explained, "but it’s a relatively new market. You want to do all you can to help the industry provide service and survive."

As a practical matter regarding the companies’ hardware, Caceres said "you have a huge constellation up there, with a design life of 15 years that could last 20. Someone’s going to provide that service. Look at Globalstar, Iridium, etc. They looked completely different when they were created" than they do today.

"Those satellites are up and working and they need to be replenished," he added. "I can’t imagine an Intelsat or Eutelsat being interested; most of the major satellite operators just aren’t interested in that market at the moment. I’d imagine some new group of investors looking to pick up something at a bargain price."

As for consumers, the bulk of whom are in the U.S. and Europe, Caceres said "most people clearly are fine without it. This is a luxury item, and if [customers] want it, they may have to pay more to keep it. The alternative is that one or the other goes under… From a market standpoint, I would hope they would be allowed to go through. It’s a little different from industries when they’re truly needed. But [in satellite radio’s case] there are other options. It’s a luxury item."