Sirius XM Chief Says Merger Debt Is 'Ugly'

By Todd Shields
Bloomberg News
Saturday, August 16, 2008

Sirius XM Radio struck an "ugly" debt deal to close the merger of the only two U.S. satellite radio operators, chief executive Mel Karmazin said.

A bond sale the evening of July 28 allowed Karmazin, previously the chief executive of Sirius, to complete the $2.76 billion all-stock purchase of Washington-based XM Satellite Radio Holdings. Together, XM and Sirius have more than 18 million subscribers and constitute the second-biggest U.S. radio operator by sales, after broadcaster Clear Channel Communications.

Karmazin, concerned that traditional radio operators might persuade a judge to block the merger he had pursued for more than a year, sought to conclude the deal within hours of getting regulatory approval. To do so, he needed to accept unfavorable terms on refinancing.

"I hated it," Karmazin said. "It was unfortunate, but we did it."

The sale of $550 million in bonds convertible into shares of the new company occurred one day before yields on debt rated below investment grade rose the most in more than a month. Moody's Investors Service rates Sirius's long-term debt Caa1, seven levels below investment grade.

Sirius XM also fell 20 percent on the Nasdaq composite index that day, and dropped further in extended trading during Karmazin's three-hour negotiation with potential bond buyers. The shares, which gained 6 cents to close at $1.49 Friday, have lost more than 20 percent since the deal closed.

XM needed to refinance $1.25 billion in debt to satisfy provisions demanding repayment when it became a unit of Sirius XM. Karmazin didn't seek refinancing until he was sure U.S. regulators would approve the takeover.

The Federal Communications Commission voted 3 to 2 to approve the deal late on July 25, a Friday. The agency posted a news release announcing the vote on its Web site the following Monday, which Sirius XM's lawyers interpreted as the final go-ahead.

XM had already raised $700 million in the junk-bond market by July 24 as regulatory approval neared. Karmazin said he had to raise $550 million more on Monday evening and seal the merger, or competitors might have persuaded a judge to stay the transaction, he said.

"My choice at 7:15 Monday night was [to] take the deal that was on the table, or wait," Karmazin said.

The extra yield investors demand to own junk bonds rather than similar-maturity Treasurys widened 0.19 percentage points, to 7.79 percent, on July 28, the biggest jump since June 26, according to Merrill Lynch data.

On July 29, XM said it set interest of 7 percent for its offering of senior subordinated securities due in December 2014, convertible into common stock of Sirius XM at an initial price equivalent to $1.875 a share.

Karmazin has said he expects to save about $400 million next year by eliminating overlap between operations at Sirius and XM.

Sirius XM faces more than $1 billion in debt repayments in 2009. Some of that will "be dealt with sooner rather than later, just to get that issue behind us," Karmazin said.

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