Short sellers seems to think the either the merger between Sirius (SIRI) and XM Satellite (XMSR) will not go through or that it will be too late for the financially crippled companies.

Short interest in XMSR rose 5.3 million shares to 28 million for the period ending June 30. The short interest in SIRI was up 5.9 million to 153.9 million. It now has the second largest short position of any stock traded on Nasdaq.

Although the FCC has signaled that it will approve the merger, Wall St. is concerned that the restrictions put on the new company will be onerous. They may not be able to raise the rates that they charge subscribers. With their unit sales slowing, the ability to move prices up could be critical to the financial health of the merged operation.

Even if the marriage is approved, each company has well in excess of $1 billion in debt. Their bonds have a "junk" rating, so raising more money may be difficult. Current shareholders would certainly face tremendous dilution.

The companies are also bedeviled by the fact that their major source of subscribers is new car sales. With auto sales in a downturn that could easily last another two years, it is unlikely that satellite radio growth will be robust.

Advantage to the shorts.

Douglas A. McIntyre

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