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Sirius CEO stuck between rock and EchoStar

February 11, 2009

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Sirius CEO stuck between rock and EchoStar

By Matthew Flamm

Published: February 11, 2009 - 3:37 pm

The long and winding saga of Sirius XM Radio may be reaching a turning point, as its chief executive, veteran media dealmaker Mel Karmazin, faces a corporate bankruptcy filing or a possible takeover by EchoStar Corp.

Most observers are betting on bankruptcy.

Sirius has $175 million in debt coming due Feb. 17 that it is unable to pay. According to the Wall Street Journal and New York Times, EchoStar Chief Executive Charles Ergen has bought up that debt as well as a $400 million loan that is due in December, and is using his holdings as leverage in negotiations with Mr. Karmazin.

Bankruptcy would give Mr. Karmazin the most room to maneuver.

“This is far from a slam dunk for Charlie [Ergen],” said Robert Unmacht, a principle in iN3 Partners, a media consulting firm. “A bankruptcy filing could give [Mr. Karmazin] time to work something out.”

EchoStar, which was spun off from Dish Network Corp a year ago, has plenty of reason to go after Sirius XM. A manufacturer of set top box equipment, EchoStar could use the radio channels to make its sister company’s satellite television offerings more competitive with rival DirecTV’s.

“Dish is losing subscribers hand over fist to the telcos and to DirecTV,” said Benjamin Stretch, media analyst at Macquarie Capital. “It needs a way to arrest that subscriber decline, and satellite radio could differentiate it from the competition.”

Sirius and its longtime rival XM Satellite Radio completed a merger in July that was supposed to cut costs and make the company profitable. But the deal saddled the new company with $3.25 billion in debt.

At the same time, the credit crisis has made refinancing that debt all but impossible and has also devastated new car sales. Sirius and XM both had deals with automakers to install satellite radio receivers in new vehicles.

Though expensive, those car deals were instrumental in giving Sirius XM a subscriber count of more than 19 million.

A Chapter 11 filing would not just give Mr. Karmazin room to breathe, but would also allow Sirius to work out new agreements with car makers and with some of the company’s high priced content providers. They include the National Football League, NASCAR, Major League Baseball, and legendary shock jock Howard Stern, who came aboard in 2006, after signing a five year, $500 million contract.

“Once [Sirius] files for bankruptcy, it’s between the company and the court,” said Shelly Lombard, high yield analyst at Gimme Credit. “That’s probably why [Mr. Ergen] is trying desperately to get something done before it goes into bankruptcy, because he’ll probably have less influence than he has now.”

But while Mr. Karmazin may be able to restructure Sirius XM, analysts say that he will still have his hands full holding onto the company he has run since 2004. The outcome may depend on how much debt Mr. Ergen has bought up.

Despite reports, analysts say that nobody really knows.

“We have no way of knowing how much of the bonds Charlie Ergen’s group actually controls, but assuming that they have been quietly accumulating a position, they could easily come out the controlling entity representing the bondholders,” said Frederick Moran, media analyst with the Stanford Group.



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