February 11, 2009

Satellite Radio Company Sirius XM Faces Possible Bankruptcy

Months after the merger that created the satellite radio company Sirius XM, mounting debt has forced the company to hire advisers to prepare for a possible bankruptcy filing, the New York Times reported.

While the bankruptcy isn't likely to affect service for Sirius XM's 20 million subscribers, high-priced talents like Howard Stern and Martha Stewart's contracts may be terminated.

Capital IQ said with over $5 billion in assets, Sirius XM would be the second-largest Chapter 11 filing so far this year behind packaging maker Smurfit-Stone, with assets of $7 billion.

Sirius XM is currently facing down $3.25 billion in debt after a business model that has operated on rolling over its enormous debts to finance sending satellites into space and paying talents like Stern's $100 million a year salary.

The dragging automobile industry, which sells vehicles with its radio technology installed and represented the largest customer base among Sirius XM's 20 million subscribers, has also affected the company's income.

Sirius XM owes about $175 million in debt payments at the end of February that it is unlikely to be able to pay"”possibly paving the way for a takeover by EchoStar, the TV satellite company, which has bought up Sirius XM's debt.

Sirius XM's chief executive Mel Karmazin has been in talks with EchoStar's chief executive, Charles W. Ergen, over Sirius XM's options, according to people involved in the talks. Those close to the meetings say Karmazin and Ergen have not been getting along, and Karmazin has refused Ergen's takeover advances in the past.

People involved in the meetings said Sirius XM hired Joseph A. Bondi of Alvarez & Marsal and Mark J. Thompson, a bankruptcy lawyer with Simpson, Thacher & Bartlett, to help prepare a Chapter 11 filing.

A person familiar with the matter told the New York Times that documents and analysis are close to completion and a filing could come in days.

The bankruptcy move could also be part of a negotiation move with Ergen, who could decide to convert his debt into equity instead of demanding payment.

However, EchoStar also owns $400 million of Sirius XM's debt due in December. EchoStar could attempt to take over the company in court, should Sirius XM file for bankruptcy.

Sources say Ergen could, however, be able to negotiate to convert his shares before bankruptcy at an attractive rate and gain control of the company.

The sale or bankruptcy of Sirius XM would be one of the first failures for Karmazin, who founded Infinity Broadcasting, sold it to CBS and later merged the combined companies into Viacom, where he had a notoriously difficult relationship with Sumner M. Redstone, the chairman, before being ousted.

In August, Karmazin bought two million shares of Sirius XM at $1.37 a share. Before that, he had bought 20 million shares at an average price of $5 each. On Tuesday, Sirius closed at 11.4 cents a share.

But the company's prospects have taken a turn for the worse since summer.

Karmazin said in December he wasn't trying to paint a rosy picture about the company's future. "We have challenges connected to our liquidity and certainly our stock price is dreadful," he said.
"But, you know, our revenues are growing double digits. We're growing subscribers. We're not losing subscribers."

The success of the Sirius XM merger was dependent on nearly $400 million in annual cost savings and the potential to gain subscribers through deals with auto companies to put satellite radios in vehicles.

However, the satellite radio venture has had trouble gaining many younger listeners, and subscriber growth has been slow because of other sources of competition.


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