Sirius Business – Liberty Injects $530 Million into Satellite Radio Provider

By Don Miller
Associate Editor
Money Morning

Liberty Media Corp. (LCAPA) will acquire two board seats and as much as 40% of Sirius XM Radio Inc. (SIRI) in exchange for $530 million in loans.  The deal creates a satellite-media juggernaut combining DirectTV Group Inc. (DTV), the largest satellite-TV provider, and the sole U.S. satellite-radio operator.

The deal also marks another chapter in an ongoing saga featuring John Malone, Liberty's CEO, and rival Charles Ergen, the satellite-TV pioneer behind Dish Network Corp. (DISH) and sister firm Echostar Corp. (SATS).  The two have occasionally worked together but are major competitors in satellite, as they were when Malone controlled cable-television company Tele-Communications Inc.

"Sometimes they play nicely together in the sandbox, but sometimes they are good, old-fashioned rivals," satellite analyst April Horace of Denver-based Janco Partners told the Denver Post.  Both companies are headquartered in Englewood, Colorado.

Under terms of the agreement, Liberty would provide a $280 million senior secured loan   to help Sirius repay $171.6 million in convertible notes due yesterday (Tuesday), which are owned by Ergen.  At a later date, Liberty would provide another $150 million loan to XM Satellite Radio, Sirius XM's wholly owned subsidiary, and purchase up to $100 million of XM's credit facilities, according to Bloomberg News.

The loan will pay Liberty a whopping 15% interest rate and mature in December 2012. When the second loan is completed, Liberty will get 12.5 million shares of preferred stock convertible into 40% of Sirius XM common stock.

The deal allows Sirius to avoid bankruptcy and a major shuffle of talent. A bankruptcy filing could have threatened contracts with such luminaries as Martha Stewart and Bob Dylan, as well as the company's five-year, $500 million pact with Howard Stern.

Sirius has never been profitable, mainly because it was burdened with massive interest payments on its debt. After acquiring rival XM in July, it was hit hard by the credit crunch and poor auto sales - its main distribution channel.  Sirius XM has about $3.25 billion in total debt.

"Sirius is in the process of getting out of the woods because Liberty is putting up a lot of money," David Joyce, an analyst with Miller Tabak & Co., told Bloomberg News. "It shows that Sirius will be around for a long time."

Malone and Ergen, who have been fierce rivals over the decades, were again pitted against one another by Sirius Chief Executive Mel Karmazin to save the company he formed just seven months earlier. 

In 2003, Ergen abandoned a bid for DirecTV's then-parent company, Hughes Electronics Corp. because he couldn't get regulatory approval. Malone gained control of DirecTV last year after buying out Rupert Murdoch's News Corp.'s (NWSA) stake. Ergen's Dish Network had 13.8 million customers as of Sept. 30, trailing DirecTV's 17.3 million.

The Liberty deal came after recent efforts by Ergen to acquire control of Sirius by purchasing its maturing debt, following an unsuccessful takeover bid in December, according to the sources cited by Bloomberg.

Ergen, a former professional gambler, bought the majority of a $300 million batch of discounted Sirius bonds that came due Tuesday. The company, said Feb. 13 it might have to file for bankruptcy if it couldn't reach an agreement to restructure the debt.

Ergen offered to restructure the debt and invest several hundred million dollars into Sirius in exchange for control of the company.  That plan was scuttled by Liberty's "white knight" move, which allows Karmazin to keep his job as CEO.

Liberty's plans for Sirius are unclear.

"We think that John Malone and Charlie Ergen's strategies are different," Thomas Eagan, an analyst at Collins Stewart told Reuters. "We think that Charlie Ergen's strategy may have been more about creating a broader strategic play in wireless services as he has attempted mobile video before. For John Malone it's more of a financial investment. He had this venture fund with cash available and he figured this was a worthwhile investment."

Whatever his motives, Ergen's strong personality and previous clashes with Karmazin may have presented obstacles impossible to overcome.

The two locked horns in 2004 when Karmazin was head of media giant Viacom. When talks broke down over rate hikes imposed by Viacom for the rights to carry certain channels, Ergen published Karmazin's home number and told subscribers to call him.

"I can't imagine Ergen and Mel Karmazin working that well together," said Matthew Harrigan, an analyst at Wunderlich Securities.

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