February 27 2008: 1:41 PM EST
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Static in the satellite radio market

With the proposed merger of XM and Sirius still on hold, investors are beginning to wonder whether the medium can survive an economic downturn.

By Scott Moritz, writer

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NEW YORK (Fortune) -- The stalled merger between satellite radio duo XM and Sirius has suddenly lurched into the unknown as Wall Street continues to wait for a verdict from regulators.

New York-based pay radio broadcaster Sirius took a new, mysterious turn in the ongoing takeover saga Tuesday, declaring that it will not provide any forecast for its business until the fate of the merger - which was announced nearly a year ago - is determined. That puzzling news comes as XM gets set to report its fourth quarter earnings Thursday. XM, too, is likely to leave investors hanging with no financial guidance for 2008, as well as announce mixed, slightly disappointing results.

Tellingly, even though financial analysts and many merger watchers anticipate an ultimate approval, investors are not nearly as convinced that the deal will go through. The price of XM's stock trades more than $1 below the proposed deal price - significantly below the value of the 4.6 shares Sirius proposes to exchange for each share of XM. And with losses mounting and cash dwindling, analysts say both companies will need to secure new debt financing sometime next year or sooner.

What's gone wrong with satellite radio? After a rapid growth phase between 2002 and 2004, subscriptions - typically $13 a month - have begun to plateau. Plus new car sales, a key component of XM and Sirius' subscriber gains, have also cooled.

That's why there's so much importance attached to the merger of the only two satellite radio shops - and why the government's foot-dragging has been so frustrating for the companies and their shareholders. The proposed merger has been under review by the Justice Department and the Federal Communications Commission for roughly a year; March 22 will be the uncomfortable anniversary of the deal's filing with the FCC, blowing past any 180-day review deadlines the agency tries to observe.

Some observers are surprised that the antitrust team at the Justice Department - after 53 weeks of review and counting - has yet to take action on the proposed satellite radio monopoly. "The merger is an outrage," says former Justice Department attorney Steve Axinn of Axinn, Veltrop & Harkrider. "If it were me, I would stop this merger," says Axinn, arguing that a single player in the market is anticompetitive. But clearly, if Justice was holding to that definition, the agency would have built a case against the merger months ago. Axinn says the delay has "gotten to the point of embarrassment," but he thinks it's unlikely that it will be stopped.

Some Washington, D.C. based merger analysts say that the FCC is genuinely deadloacked, and that further delays jeopardize the approval. David Trout with M&A Research says there's less than a 1-in-3 chance of approval at this point. "This deal's chances of success have diminished as the transaction reaches the one-year mark," says Trout in a report.

But the more conventional take is that eventually the deal will go through with conditions like price caps to mollify consumer advocates. Either way, it's no guarantee that paid satellite radio has a bright future, argues one New York money manager who has no position in either XM (XMSR) or Sirius (SIRI). "The funny thing is, the only good news for these two stocks will come in the next six months, with the approval," says the money manager. "But then it's all downhill from here as the economy tanks."  To top of page