Earlier this week The New York Times reported that the satellite radio provider Sirius XM is on the verge of bankruptcy and may have to drastically cut costs - including the possibility of restructuring or terminating the contracts of high-priced talent such as Howard Stern, Martha Stewart and, sadly, Major League Baseball.
With assets of over $5 billion dollars, a bankruptcy filing by Sirius XM would be the second largest behind the $7 billion dollar bankruptcy filing by Smurfit-Stone. When the FCC approved the merger between Sirius and XM last summer, Sirius XM took on a debt load of $3.5 billion dollars. Before the merger, neither Sirius or XM had made a profit.
Now that credit has dried up - along with declining car sales from America's Big Three automakers - Sirius XM has suffered from a cash flow crisis. Sirius XM had been relying upon new car owners - like me - to continue to pay for the service after the three month trial period is over. People aren't buying new cars and sales of home-based receivers have not lived up to expectations and projected sales when the two services merged.
Industry reports persist that Charlie Ergen, the CEO of EchoStar, may make another formal bid to buy Sirius XM. According a story in the Wall Street Journal, Ergen made an offer to buy Sirius XM last summer but was shot down. Echostar has loaned Sirius XM about $400 million dollars over the past year to help keep the company afloat.
Next Tuesday, a $175 million dollar payment is due from Sirius XM to Echostar as part of the pay-off on the debt. And $350 million dollars in loan payments to various banks is due by the end of the month. If the payments can't be made, Sirius XM may be forced into bankruptcy. Ergen doesn't want them to go into bankruptcy and reports are that the current offer on the table to buy controlling interest of Sirius XM is about $100 million dollars. Wall Street analysts say that the offer may be too low. They say that it may take as much as $750 million to $850 million in cash to bail out Sirius XM.
Should Ergen convince Sirius XM stockholders to sell (the stock is hovering around 10 cents a share), his leverage would be that any bankruptcy would effectively wipe away any shareholders equity in the company. And Mel Karmazin, the CEO of Sirius XM (right), may have to capitulate because filing bankruptcy would undoubtedly mean a series of shareholder lawsuits against management for failing to preserve at least some of the equity in Sirius XM shares, no matter how small it may be.
While services during the bankruptcy period wouldn't go away, speculation persists that if Ergen were to take control of Sirius XM, he may get a chance to either dump or renegotiate the rich contracts that burden the company. Many of the deals with Howard Stern, Major League Baseball, the NFL and Oprah Winfrey were severely inflated due to bidding wars going on between Sirius and XM when they were separate entities.
Finally, one of the big issues that's causing Sirius XM the problems they face today goes back to the foot-dragging by the Federal Government as they deliberated whether the merger between the two satellite radio companies didn't violate anti-trust laws. When the Feds finally got around to agreeing to the merger, the two services had exhausted themselves in terms of legal fees, lobbying efforts and other expenses. Add to this, there was the continued negotiations for on-air talent and content that led to over-inflated contracts that sank both services deeper into debt. By the time they said it was OK to merge, Sirius XM had a debt load of around $3.5 billion dollars.
The Feds also tacked on some weird arbitrary rules such as the one that forces Sirius XM to hand over 8 percent of their allotted channels for "public service" or "non-commercial" programming. Since most of their programming is already non-commercial, this really only affected the notion of "public service" channels. And the definition of "public service" is so vague that it could really be any sort of programming that is deemed "public". It was actually designed to encourage "minority" programming. But so far, nothing has come about as to what that really means.
The situation is entirely fluid as Karmazin and Sirius XM are scrambling to find funding to stave off the unsolicited takeover by EchoStar. The Wall Street Journal reported yesterday that Karmazin had turned to John Malone of Liberty Media Corp. to help fend off the EchoStar takeover. What is ironic throughout all of this is that Liberty Media - which is a large shareholder in DirecTV - is a direct competitorwith EchoStar - which owns Dish Network.
This ought to be pretty interesting. Stay tuned...
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