Liberty Media deal may keep Sirius XM solvent

When XM and Sirius Satellite Radio merged last year, the acquirer took on financing debt from XM that it didn't expect. Now a white knight may have emerged to help the merged entity meet obligations due now.

Very few analysts doubt the ability of the satellite radio market to grow and flourish; the problem facing Sirius XM is not that its own market is declining. According to an October 2008 prospectus from Morgan Stanley (PDF available here), some $400 million in convertible senior notes at 1.75% interest are due this year, carried over from XM along with nearly $600 million in various other debts, including "revolving credit." And some $300 million in 2 1/2% convertible notes from the Sirius end are due...well, now.

So help is coming now, and it may be from a more preferable source, from Sirius XM's point of view, than its arch-enemy in the satellite broadcasting business, EchoStar. John Malone's Liberty Media, with major stakes in IAC/InterActive Corp. and DirecTV, has agreed to loan Sirius XM $530 million in exchange for equity in the company, according to a joint announcement from the two firms this morning.

The announcement revealed that Sirius XM may have been short $171.6 million in being able to repay the $300 million "convert," which literally was due today. Over the weekend, analysts feared the satellite radio broadcaster would be forced to file for Chapter 11 protection; this morning's investment from Liberty allays that fate. Some $250 million of Liberty's investment will be funded today, in the form of a 15% interest loan due at the end of 2012.

Later, Liberty will loan the XM Holdings division $150 million, and purchase $100 million of that carried over credit debt. In exchange for Malone's generosity, Sirius XM will issue Liberty about 12.5 million shares of preferred stock, which would give Liberty a 40% stake in the merged entity, and which would likely see Malone and partner Greg Maffei elected to Sirius XM's Board of Directors.

Last September, Liberty announced its intention to spin off its DirecTV and other media properties into a subsidiary called Liberty Entertainment. But in this morning's announcement, the company stated that the investment in Sirius XM will be attributable to Liberty Capital, not the spinoff.

While the need for a rescue has brought attention to whether the merger should have happened in the first place, one may reasonably question whether Sirius or XM could have, on their own, maintained the perceived future shareholder value necessary to obtain financing deals for themselves in the face of this negative economy.

Presently, Sirius XM service is also carried by Dish Network, the spun-off former division of EchoStar which invested heavily in Sirius XM's share offering late last year. Subscribers and followers of digital media now wonder whether that carriage deal may be off, whether Sirius XM may soon find itself on DirecTV, and whether a selloff from EchoStar may be forthcoming.

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