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Sirius XM Satellite Radio Short On Cash to Cover Debt Payment

By Cecilia Kang
Washington Post Staff Writer
Thursday, February 12, 2009

Last September, Sirius Satellite Radio chief executive Mel Karmazin was fresh off the 18-month regulatory battle that led to the merger with XM Radio. In his characteristically outspoken fashion, he recognized the poor timing of combining the nation's only two satellite radio providers: The newly formed and heavily debt-saddled company debuted just as credit markets froze to a standstill.

"Am I going to lend the company the money? I hope not. I hope we don't get to that," he said to analysts at an investors conference.

But things appear to have gotten much worse. On Tuesday, $175 million in debt is due. And with no apparent way to pay it, a source with knowledge of the company said officials have begun to fill out paperwork in the event that the company needs to declare bankruptcy of the satellite radio operator that hosts both shock jock Howard Stern and household diva Martha Stewart.

Karmazin is said to be racing to find a way to avoid bankruptcy, according to the source, who spoke on the condition of anonymity because he is not authorized to speak. Analysts say bankruptcy could threaten the viability for 20 million subscribers of the satellite radio service that has never turned a profit. Still, it is unlikely that Sirius would end service, and the business could be attractive to a suitor hoping to capture the firm's subscriber base and more than $2 billion in annual revenue.

Sirius spokesman Patrick Reilly declined to comment for the story.

The source played down the company's preparation for bankruptcy calling it "procedural." The company "is obligated to be prepared to file because we don't have the money, and until we do we need to get the documentation in place," the source said.

Analysts said the company's efforts to secure an investor to buy Sirius's debt in exchange for stock have been unsuccessful as shares have plummeted to 5.5 cents yesterday from a near $4 high a year ago.

"It clearly cannot garner any support from lenders, because company subscriber growth has disappeared, and it still faces material operating losses," said Frederick Moran, media analyst at Stanford Group.

Sirius has suffered from a slowdown in subscriber growth as consumers clamp down on spending and the U.S. auto industry -- the company's main source of revenue -- has seen a dramatic decline in sales. Many new cars come equipped with Sirius satellite radio.

Although revenue has grown, Sirius is saddled with $3.2 billion in debt and heavy operating costs, such as Stern's $100 million yearly contract. It has tried to reduce costs through layoffs; 22 percent of the staff was let go in December, including many from XM's building in Northeast Washington.

In August, Karmazin bought 2 million shares of Sirius XM at $1.37 a share to help boost the stock.

The source denied reports that a bankruptcy filing would be an attempt by Sirius to avoid a takeover by television satellite provider, EchoStar. EchoStar spokesman Marc Lumpkin and Reilly of Sirius declined to comment on the reports.

Chris Murray, senior counsel for Consumers Union, a public interest group, said that if Sirius goes into bankruptcy, subscribers shouldn't expect to see their service end. Bankruptcy would have more of an impact on debt holders of the company and may even give Sirius more flexibility to work out its debt troubles.

Some consumers have complained that Sirius's financial problems have affected service and pricing. The layoffs led to some longtime disc jockeys losing their jobs as well as changes in programming. The company also has announced it will raise prices for subscribers with multiple accounts March 11, to $9 from $7. And it will charge for its online music feed.

As a condition of the merger, Sirius had agreed not to raise prices for its basic subscription service. Federal Communications Commission acting chairman Michael J. Copps said in a news conference yesterday that the agency would monitor the company's fulfillment of its promises.

"We hate to say I told you so, but we told you so," Murray said. "This is the problem with merger to monopoly in that there's nothing to discipline pricing."

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