Analysts handicap Sirius/XM deal's fate with regulators; Circuit City clears way for Blockbuster and Icahn

By Paul A. Harris

St. Louis, May 9 - Shares of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. both traded lower on Friday as a special situations equities source parsed the latest news.

In an Ex Parte letter, Washington state's attorney general informed the Federal Communications Commission that a conference call between staff members from offices of attorneys general from 10 states and FCC commissioner Jonathan Adelstein was held on May 7 to discuss the states' concerns regarding the proposed Sirius-XM merger.

Meanwhile counsel for Sirius and XM met with FCC chairman Kevin Martin on Thursday.

Equities analysts who cover XM told Prospect News on Friday that the in spite of apparent headwinds from the regulators, including likely opposition to the merger on the part of Adelstein and Martin, the $13 billion all-stock merger of equals, which was approved by the U.S. Department of Justice March, has a decent chance of getting done.

Both analysts, who agreed to speak off the record, said that investors presently are focusing on what concessions the regulators will demand from the merged entity.

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One analyst said that there is more political noise to come on the Sirius-XM merger because big media mergers make excellent political targets.

"Media mergers always spark a public outcry of opposition from politicians," the analyst asserted.

"Legislators can tell their constituents they are fighting the deal in order to promote diversity of media and competition.

"However in the end it comes down to who has jurisdiction."

This analyst, who believes that Adelstein is against the merger and is trying to drum up support for his position, said that the FCC will make the final decision.

"I think there is a majority of commissioners that, with conditionality, would likely approve the deal," the source said.

"So this conference call would seem to be noise."

Another analyst said that although the deal is no slam dunk it's hard to see the FCC ultimately sending up a decision counter to the one the Justice Department made in March.

Focused on concessions

On Friday Sirius and XM, both of which are traded on the Nasdaq, ended lower on the day, significantly underperforming that index.

XM Satellite Radio (Nasdaq: XMSR) dropped by 3.99%, or $0.49 per share, to close at $11.80.

Sirius (Nasdaq: SIRI) fell by 3.53%, or $0.10 per share, to close at $2.73.

The Nasdaq, although it was the strongest of the three major U.S. indexes on Friday, was off by 0.23%, or 5.72 points, to close at 2,445.52.

Prospect News asked an analyst whether recent trading in the shares of either or both companies signaled a belief on the part of arbitrage players.

"There are days when people are convinced the deal is coming, and other days when they're convinced it's not coming," the analyst responded.

"There are questions as to why this has taken so long.

"I think people are more focused on what the conditionality is going to be, as opposed to what the outcome is going to be. That is the heart of the matter.

"What conditions will be placed upon the surviving entity?"

Those conditions could include some spectrum giveback, as well as concessions to third parties, the analyst said.

Circuit City opens books to Blockbuster

Elsewhere on Friday, Circuit City Stores Inc. agreed to allow Blockbuster Inc. and Carl Icahn, the largest shareholder and a director of Blockbuster, to conduct a due diligence review of Circuit City.

In an April 24 letter to Circuit City's chairman and CEO, Icahn indicated that he stood ready to acquire Circuit City if Blockbuster "...is unable to receive financing to do so or obtain any necessary shareholder approvals after doing satisfactory due diligence."

Meanwhile Mark Wattles, founder and CEO of Wattles Capital Management, told CNBC that he sees progress on a possible sale in weeks not months.

In a separate Friday press release Wattles Capital Management announced that the Circuit City board will select three of Wattles Capital Management's director nominees and include them as nominees for Circuit City's board at the company's 2008 annual meeting.

In addition, one of the Wattles Capital Management nominees will become a member of the executive committee of the Circuit City board.

Friday's news sparked a rally in the shares of Circuit City (NYSE: CC) which gained 5.85% on the day, or $0.28 per share, to close at $5.07.

Blockbuster's offer for Circuit City, pending due diligence, is $6.00 per share in cash.

Meanwhile shares of Blockbuster (NYSE: BBI) ended the day lower by 0.75%, or $0.02 per share, to close at $2.66.

Friday's situations took place against a backdrop of retreat in all three major U.S. indexes.

As mentioned above the Nasdaq gave up the least ground, 0.23%.

The S&P 500 close 0.67%, or 9.4 points lower to close at 1,388.28.

The Dow Jones Industrial Average saw the biggest decline on Friday, 0.94%, closing at 12,745.88, down 120.9 points.

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