EchoStar takeover of Sirius XM a real possibility


With Sirius XM facing a $175 million bond maturity on February 17th, the Wall Street Journal reports that EchoStar has been acquiring lots of those bonds and CEO Charlie Ergen may be eying a takeover. In theory, merging some Sirius XM (satellite radio) operations with Dish Network (satellite TV), another Ergen company, could cut costs, but Dish lost subscribers when it reported Q3 results and EchoStar itself posted a big loss for the quarter. We’ve found an old Sirius name at EchoStar, though, which makes us think this takeover has real possibilities.

Remember Joe Clayton? He was the satellite guy brought in as CEO of Sirius Satellite Radio to ramp up the business. Among other things, he agreed to pay Howard Stern over a half billion bucks to come to work for the company, before turning the helm over to Mel Karmazin. As of last October, Clayton became a member of the board of directors at EchoStar. So, Charlie Ergen has someone at hand who knows the ins and outs of the satellite radio business – especially the Sirius side of Sirius XM.

The February 17th date for the remaining $175 million of what was originally a $300 million bond issue is just the first of several financial deadlines for Sirius XM this year. Another $350 million of bank debt comes due in May and the WSJ says Ergen may have also been buying up some of that at discounted prices. Also, $433 million of convertible notes come due in December. That’s $958 million of debt that Karmazin has to refinance in the worst financing market in decades.

With that debt overhang and speculation that Sirius XM may have no recourse but a Chapter 11 filing, the company’s stock has been beaten down  to less than the price of a pack of gum. It did jump yesterday on the EchoStar takeover report, at one point moving above 20 cents a share.

Since Ergen split EchoStar and Dish into separate companies, EchoStar has described its business lines as follows: “EchoStar provides equipment sales, digital broadcast operations, and satellite services worldwide. EchoStar has 25 years of experience designing, developing and distributing advanced award-winning set-top boxes and related products for pay television providers. The company includes a network of 10 full-service digital broadcast centers and leased fiber optic capacity with points of presence in approximately 160 U.S. cities. EchoStar delivers satellite services from eight owned and leased in-orbit satellites and related FCC licenses.” It reported a Q3 net loss of $308 million, vs. a loss of $7 million a year earlier, although revenues increased 52.4% to $616 million.

Meanwhile, Dish Network delivers satellite TV to 13.78 million US households, although it suffered a net loss of 10,000 subscribers in Q3. There have been repeated rumors in recent years that Dish would merge with one or another of the major telephone companies, creating a stronger challenger to both DirecTV and cable MSOs, but nothing ever came of those rumors. Combining with Sirius XM would not appear to by the sort of synergistic merger that Wall Streeters had hoped for.

The question, though, is whether Ergen really wants the satellite radio business, or does he just want more satellite capacity for EchoStar to use for other services? Satellites are expensive and forcing Sirius XM into bankruptcy as its largest creditor could be a way for EchoStar to acquire some on the cheap.

RBR/TVBR observation: If Mel Karmazin can’t come to terms with Charlie Ergen, he does have some other options. Other bondholders have been swapping their bonds for stock. If Ergen won’t agree to do that, Karmazin could arrange to sell an equivalent amount of stock to someone else, then simply pay the bonds as they come due. But that would not resolve the long-term problems with Sirius XM’s capital structure.