Clock ticking for Karmazin; Will Sirius XM file Chapter 11?


You can bet Sirius XM CEO Mel Karmazin didn’t take the weekend off. $175 million of debt comes due tomorrow (Tuesday) and he has to either do a deal with John Malone, come to terms with Charlie Ergen or head to bankruptcy court. Meanwhile, Sirius XM announced a new deal Friday to swap some of its other bonds for new bonds. But those weren’t due until December, which is a lot further away than tomorrow.

Sirius XM confirmed Friday what everyone already knew – that it may be forced to file for Chapter 11 bankruptcy protection as soon as tomorrow (2/17) if it can’t come to terms with its creditors.

While Sirius XM shares rose Friday on hopes that Malone’s Liberty Media was in talks to rescue the company, it doesn’t appear that Liberty has any interest in buying out shareholders, or even taking control. Rather, the talks are believed to center on Liberty giving Sirius XM a financial lifeline in the form of a loan or some sort of debt assumption. That would allow the satellite radio company to continue operating, presumably with Karmazin still at the helm. It could conceivably have some business relationship to Liberty’s DirecTV, but would not combine the two.

The Financial Times reported Sunday that the offer from Malone is to make a senior secured loan that would allow Sirius XM to pay the $175 million of bonds coming due Tuesday – along with more capital to deal with other debt maturing later this year. Sirius XM would later enter into a strategic relationship with DirecTV, the FT said. But Sirius XM would continue as an independent company, with Karmazin still at the helm. Malone’s Liberty would be making a financial investment, not a takeover move.

Ergen, on the other hand, apparently does want control and it is not at all clear that he wants to be in the satellite radio business. Rather, he may want the primo satellite locations and spectrum for other things that his companies, EchoSTar and Dish Network, are doing, such as digital TV and a satellite-based broadband Internet service. Some observers think it would be difficult to get the FCC to reallocate the satellite radio spectrum and abandon nearly 20 million subscribers. But hey, if he shuts down the radio service anyway, there won’t be any users to protect.

Ergen and Karmazin had tangled before over satellite broadcast rights when Karmazin was heading CBS, so this is a rematch. Ergen appears to have the upper hand, because his company owns a lot of the Sirius XM debt coming due tomorrow and later this year.

Karmazin cleverly brought Malone into the game as a business rival to Ergen. Malone wants to maintain DirecTV’s dominant position in satellite TV and would be willing to thwart any effort by Ergen to enhance Dish – so long as the price tag isn’t too expensive.

That doesn’t mean that Karmazin and Ergen can’t come to terms on a deal. So the Zen Master can play the two moguls against each other. But if he can’t get to an acceptable deal with either one, then it’s off to bankruptcy court.

While the immediate problem is the $175 million bond issue that comes due tomorrow, the company has been simultaneously negotiating with holders of other debt that comes due later this year – an additional $750 million in all. On Friday, Sirius XM announced that it had done the swap which gives it some breathing room on a piece of that debt.

The wholly-owned subsidiary XM Satellite Radio Holdings exchanged approximately $172.5 million aggregate principal amount of its outstanding 10% Convertible Senior Notes due December 2009 for the same amount of new Secured Notes due 2011.

The new Senior Secured Notes will mature on June 1, 2011. The notes will bear interest at the following rates: initially at 10% per annum paid in cash; from December 1, 2009 to December 1, 2010, at 10% per annum paid in cash and 2% per annum paid in kind; and from December 1, 2010 to maturity, at 10% per annum paid in cash and 4% per annum paid in kind. The purchasers of the new Senior Secured Notes will be paid an aggregate structuring fee of $9.45 million, $5.07 million of which was paid in cash and $4.38 million of which was paid in the form of shares of Sirius XM common stock based on the closing sales price of the Company’s common stock on February 12, 2009, which was $0.074 per share.

After the exchange, approximately $227.5 million aggregate principal of XM Holdings’ 10% Convertible Senior Notes due 2009 will remain outstanding.

RBR/TVBR observation: Talk about a high stakes poker game! Mel Karmazin playing Charlie Ergen and John Malone against each other. Of course, for Mel, the problem is that to save his company he has to partner with one of the two and then try to live happily ever after. But then, bankruptcy court wouldn’t be any fun, either.