Sirius XM's Fate at Stake in a Radio Cliffhanger

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Posted by on February 17, 2009 at 10:25:49:

Sirius XM's Fate at Stake in a Radio Cliffhanger

Published: February 16, 2009

Mel Karmazin, the irrepressible chief executive of Sirius XM Radio, worked his phone all last week from his corner office on the 37th floor of the McGraw-Hill building, just above Howard Stern's studio. "Get John Malone on the line," he shouted to his assistant. Ten minutes later, he was calling "Charlie" - as in Charles W. Ergen of EchoStar Communications, the owner of Dish Network.

Between those calls, he was dialing up Roger C. Altman of Evercore Partners, the former deputy secretary of the Treasury, and James B. Lee Jr., the vice chairman of JPMorgan Chase. "We gotta find a way to make this work," he would say to just about anybody who would listen to him.

Mr. Karmazin, a born salesman, wasn't just jabbering - he was battling to prevent bankruptcy at Sirius XM, the satellite radio giant he had fought to create by merging Sirius and XM Radio less than a year ago.

Mr. Ergen, his longtime nemesis, had cleverly bought up $175 billion of Sirius XM's debt, knowing full well that Mr. Karmazin couldn't afford the payments, so he could turn around and try to take control of the company.

And the due date is today.

On Monday night, Mr. Karmazin was near a deal to pull off the impossible: he had coaxed Mr. Malone of Liberty Media, which owns DirecTV - and who is a fierce rival of Mr. Ergen's - to be his white knight and agree to invest hundreds of millions of dollars in the company in exchange for several board seats and a minority stake, according to people involved in the negotiations.

Even more extraordinary is that Mr. Malone's investment, which could end up costing as much as $450 million, or possibly more depending on how you calculate it, is more than the company's market capitalization - and Mr. Malone isn't getting control.

If the deal doesn't hit a last-minute snag, Mr. Karmazin will have managed to save his company - and his job (Mr. Ergen wanted to fire him) - by pitting some of the most hard-nosed negotiators in the business against each other, all while he held what no doubt looked to be a losing hand.

As part of the transaction, Mr. Malone is to pay about $265 million now - which will be used to pay off the $175 million that Sirius XM owes Mr. Ergen today - as well as make a second payment of up to about $200 million in the fall to help pay off about another $400 million that Sirius will owe, these people said.

Mr. Ergen had bought a part of that second piece of debt to act as another tripwire, but with this deal, he will probably lose his opportunity to take over the company. Of course, Mr. Ergen won't go away empty handed: he most likely will make a handsome profit by having bought up Sirius's debt on the cheap and being paid off at its face value - by Mr. Malone, no less.

A spokeswoman for Sirius XM declined to comment. Spokesmen for Liberty and EchoStar could not be reached for comment.

What's less clear is why Mr. Malone or Mr. Ergen want Sirius XM so badly in the first place. There doesn't appear to be much overlap, in part because the technology is so different. Certain satellites that were part of the XM network could be converted to other uses, like rural broadband or high-definition television, but to do that could be expensive and create a legal quandary.

Rebecca Arbogast, an analyst at Stifel Nicolaus, said that even if the satellites' uses could be modified, "as a legal matter, we do not believe that either Dish or DirecTV could use the spectrum assets for a mobile video service or a broadband data service," without a change in service rules by the Federal Communications Commission.

Still, Mr. Malone and Mr. Karmazin are likely to argue that there are synergies. The biggest? Programming. All three companies - Sirius XM, EchoStar and DirecTV - battle for rights to broadcast sports and other entertainment and news.

The heft of DirecTV and Sirius XM could put pressure on fees the next time programming comes up for auction. The two companies can also very likely take advantage of their customer bases to market to each other, creating package deals for both services.

In the end, however, the deal may be more about money than strategy. Mr. Malone, who has never been driven by emotion, may see a good business saddled by a very bad capital structure. It is a story we are likely to see played out over and over again this year.

While Sirius XM is burdened with $3.25 billion in debt, it has about 20 million subscribers who generate a revenue stream of some $2 billion annually. If Sirius XM can solve its debt problem, the company's value is likely to jump sharply. (One of the great ironies of the merger of Sirius and XM was the expectation that the combined company could borrow money more cheaply.)

Still, Wall Street is likely to be shocked that Mr. Malone is investing in Sirius XM. All last week, the inside line was that he was just being used by Mr. Karmazin as a ploy to help in his negotiations with Mr. Ergen.

"Liberty involvement is more likely an effort by Sirius XM to attract a competing bidder," Vijay Jayant, an analyst at Barclays Capital, wrote in a report. "We don't believe the company is fundamentally interested in becoming involved in the satellite radio business."

Likewise, Thomas Eagan, an analyst at Collins Stewart, wrote in a note on Thursday, "We believe it is highly doubtful that Liberty makes an investment in or acquires Sirius."

It was on Thursday, however, that Mr. Malone and Mr. Karmazin secretly agreed to pursue the deal, according to people briefed on the talks. Indeed, despite reports in other news outlets of a near deal between Mr. Ergen and Mr. Karmazin, there was never much of an offer at all - Mr. Karmazin rejected Mr. Ergen's offer of $500 million to take over the entire company out of hand. For Mr. Karmazin, the options were "Malone or bust," one person involved said.

It was vintage Mr. Karmazin. "You have to play the hand you're dealt," he said in an interview last fall. "Right now, I don't like my hand. But we'll play it."

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