XM agreed in February to be acquired by Sirius Satellite Radio Inc., (SIRI) a $13.6 billion deal that has drawn close regulatory scrutiny. Terms call for Sirius to pay 4.6 shares for each XM share. This agreement has yet to receive Federal Approval. While it does appear that Sirius might be able to stand alone and most experts agree the merger has only a fifty - fifty chance of approval. Bank of America recently trimmed its forecast of anticipated savings to $3.6 billion, from $5 billion based on program costs resulting from a merger. ESA predicts a merger is more likely than not for the following reasons:

OEM Sales - Sirius in the Lead

Sirius by partnering with Toyota, Honda and Nissan as an OEM has superior sales opportunities which have resulted from Ford and Chrysler's declining market share.

Sirius and rival XM Satellite Radio Holdings Inc. sell radios in stores and through deals with auto makers, which add radios directly to new cars. XM Satellite partners include Toyota Motor Corp., General Motors Corp., Nissan Motor Co. and Honda Motor Co., are gaining market share as compared with Sirius's partners, Ford Motor Co. and DaimlerChrysler AG, which are losing market share.

Subscriber Acquisition Cost - Sirius in the Lead

XM anticipated subscriber cost for 2007 are $95.00 while Sirius costs are expected to range from $111.00 to $114.00. XM now expects 2007 subscriber acquisition cost per gross addition to range $111 to $114. For 2007, Sirius still expects SAC per gross subscriber addition of about $95.

Sirius subscriber acquisition cost per gross subscriber addition, a key metric, fell 8% to $104 from $113, due to "lower average commission rates and decreased average subsidy rates as the company continued to reduce manufacturing and chipset costs. XM Subscriber acquisition cost per gross addition rose to $103 from $93 a year earlier.

Subscribers - XM in the Lead (Barely)

Sirius ended the first quarter with more than 6.58 million subscribers, representing a 61% gain over the prior year. Sirius picked up more than 556,000 net subscribers in the quarter, easily surpassing most analysts' expectations. Customers who subscribed to Sirius units factory-installed in cars and other vehicles rose to 365,000 net additions from 225,000 a year earlier. Sirius average monthly churn, or the rate of subscriber cancellations, rose to 2.3% from 1.8%. The company reiterated its year-end forecast that average monthly churn would be in the range of 2.2% and 2.4%.

XM said it ended the first quarter with 7.9 million subscribers, picking up 285,000 net new customers in the three months. XM reiterated that it expects to end 2007 with 9 million to 9.2 million subscribers, and still expects to post subscription revenue around $1 billion and positive cash flow from operations in 2008. XM company has seen strength in subscriber growth from those who purchase XM service as a factory-installed option in cars or trucks, says Signal Hill Capital Group analyst Maurice McKenzie. XM Churn, or the rate of subscriber cancellations, rose to 1.78% from 1.64%. The company had predicted that churn would rise in the first quarter after increasing in the December quarter. The rate of new-car owners with XM-equipped vehicles that agreed to subscribe to the service, known as the conversion rate, declined to 51.5% from 54.3%. Amid a soft retail market, XM saw retail subscribers to its service rise to 4.44 million from 3.88 million in the prior year.

Revenue - Sirius Ahead

Sirius revenue rose 61% to $204 million. XM Revenue rose to $264.1 million from $208 million. Sirius recently reiterated its 2007 forecasts for subscribers and revenue, calling for a year-end customer total of more than 8 million subscribers and revenue of nearly $1 billion. Sirius (SIRI) lost $144.7 million, or 10 cents a share, compared with a loss of $458.5 million, or 33 cents a share, in the same quarter a year earlier. Excluding stock-based compensation, Sirius would have lost $120.5 million, or 8 cents a share, in the latest three months.

XM Satellite Radio Inc. has reiterated its 2007 subscriber and revenue outlook. XM had a loss of $122.4 million, or 40 cents a share, compared with $151.4 million, or 60 cents, in the year-earlier quarter.

Conclusion

ESA believes that new competition outside free broadcast radio and satellite radio creates a market that is sufficiently competitive to permit the XM - Sirius merger. The rise of internet radio, the pervasiveness of wi-fi and the continued growth of downloaded broadcasts for replay combine to create a market that is broadening in terms of competition rather than shrinking.

Sirius and XM have steadfastly claimed their union would not stifle competition. Karmazin has said he'll take the steps needed to ensure the deal wins approval.

More extensive reports outlining their stance are expected while the FCC solicits input from the public. The Justice Department isn't expected to make its decision until late summer or early fall. FCC approval could take even longer.

Publicly both Sirius and XM state they believe their merger will be approved. ESA believes these are both a hold.