Sirius Dodges Bullet; Will Debt Holders?
February 19, 2009
This was a Sirius save. With bankruptcy charging around the bend, Liberty Media rode in on its horse, you know the color, and snatched Sirius XM Radio from the clutches of doom. Or so the story goes.
Not that Liberty gave up the goods for free. Heroism don’t come cheap around these parts, meaning Liberty’s John Malone forced the debt-ensnared satellite radio company to agree to a pretty hefty fee (a 15% coupon) before snipping the rope with a loan of $530 million.
Now the question is: Was this hero the right one? Or was it—I know this is hard to imagine, but just go with me here—a decision based on a CEO’s ego and self-preservation rather than what is best for the company and its lenders?
Consider this: Another $700 million offer from satellite entrepreneur Charles Ergen and EchoStar would have given Sirius XM more financial flexibility and met its debt obligations until roughly 2012.
It appears the issue for Sirius chief executive Mel Karmazin was control—the control Ergen wanted. Ergen sought a 51% stake in the company, whereas Malone seemed happy with less power and more money. For its investment, Liberty will receive 40% of Sirius XM’s common stock and a couple of seats on its board of directors.
Oh, did I mention that Ergen and Karmazin haven’t always been BFFs? And Karmazin likely didn’t relish the idea of working under his former rival.
So Liberty it is. Under this agreement, Sirius only received $280 million upfront, with most of that used immediately to pay off $172 million in bonds. To get the rest of the money, the company has to persuade holders of $350 million in bank debt due in May to extend the debt. Assuming that deal gets done—and if Sirius stops burning through cash—the company should have the funds to pay off the second big maturity this year, bonds due in December.
Any problems in paying off these bonds could cause complications, however, because guess who owns most of them? Ergen’s EchoStar, which had been buying up Sirius debt in an effort to gain control. (Just like a real-life radio drama, isn’t it?)
So—da, da, da!—will Ergen have the last jackal-like laugh? Will Sirius stop bleeding cash? Will debt holders get their due? Will the naked stripper on the Howard Stern show chew the head off of a live duck?
Stay tuned folks. And as always, look at the bright side: Two heroes are better than one. And one is more than what most suffering high yield companies can round up.
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