By David B. Wilkerson
CHICAGO (Dow Jones) - Shares of Sirius XM Satellite Radio as
much as doubled Tuesday morning on news that John Malone's Liberty
Media has agreed to invest a total of $530 million in the the
beleaguered radio company, allowing it to avoid a Chapter 11
bankruptcy filing.
Sirius XM (SIRI) shares were up 7 cents, or 71%, at 18 cents, in
mid-morning trading.
For Malone, who is expected to take a seat on Sirius XM's board
of directors, the deal has the added benefit of slamming the door
on the plans of rival Charlie Ergen, chairman of EchoStar (SATSV)
and Dish Network (DISH), who had also been in negotiations with the
satellite radio provider. Malone and Ergen have been butting heads
for many years, going back to the 1990s when Malone ran
Tele-Communications Inc.; TCI was the biggest U.S. cable provider
at the time.
Under the first phase of the transaction, Liberty (LCAPA)(LMDIA)
will loan Sirius XM $280 million -- $250 million of which will be
funded on Tuesday. Sirius XM will use some of the proceeds of that
loan to pay $171.6 million of the $175 million in 2 1/2%
convertible notes that are due at the end of business Tuesday.
Liberty's loan to Sirius XM will bear interest at a rate of 15%,
and will be due in December 2012. It will be secured by the assets
that secure Sirius XM's existing credit agreement.
In the second phase of the deal, Liberty will loan another $150
million to XM Satellite Radio, Sirius XM's wholly-owned subsidiary.
Liberty has also agreed to offer to buy up to $100 million of the
loans outstanding under XM's existing debt agreements.
Once both phases are completed, Sirius XM will issue Liberty
12.5 million shares of preferred stock, which Liberty can convert
into 40% of the company's common stock. Liberty Chairman John
Malone and Chief Executive John Maffei would then join Sirius XM's
board of directors.
The companies said the loan agreements do not constitute a
change in the control of Sirius XM, and are not subject to the
approval of the Federal Communications Commission.
Standard and Poor's Equity analyst Tuna Amobi maintained his
hold rating on Sirius XM shares in the wake of the news Tuesday,
saying that the company must still figure out what to do about a
payment of $350 million due in May, and another $228 million in
notes that mature in December.
Mel Karmazin, Sirius XM's chief executive, said the deal enables
his company to "develop the opportunities first outlined in the
merger of Sirius and XM." He added, in a statement, that the
transaction strengthens Sirius XM's capital structure and enhances
its financial flexibility.
Liberty Chief Executive Greg Maffei said Liberty has been
"impressed" with Sirius XM, and that its "ability to grow
subscribers and revenue in a difficult financial and auto market is
indicative of how listeners view this as a 'must have'
service."
In February 2007, satellite-radio providers Sirius and XM, both
of which had been losing millions of dollars per quarter for
several years, announced that Sirius would acquire XM in a $13.6
billion deal. After a protracted regulatory review that frustrated
the companies and their stockholders considerably, the transaction
was completed last July.
To facilitate the acquisition of XM, Sirius took on a massive
amount of debt.
Weighed down by $2.8 billion in long-term debt as of Sept. 30,
Sirius XM had been considering a Chapter 11 bankruptcy filing if it
could not pay off a $175 million tranche of debt due on
Tuesday.
Ergen had made an offer for the company not long ago, but Sirius
XM turned him down.
The decline of U.S. auto sales, exacerbated by the financial
crisis of recent months, has hurt many media outlets that depended
on the big ad budgets of automakers. For Sirius XM, fewer car sales
have meant fewer activations of satellite-radio service.