Liberty Extends $530 Million Loan to Bail Out Sirius XM

By Cecilia Kang
Washington Post Staff Writer
Wednesday, February 18, 2009

Liberty Media, the company that owns DirectTV and the Discovery channel, yesterday threw faltering Sirius XM Radio a lifeline, agreeing to loan the company $530 million to help pay off some of its debt and avoid bankruptcy.

The deal will give the Englewood, Colo., media company the largest stake in the nation's only satellite radio provider and access to Sirius's best assets: 20 million subscribers and $2 billion in annual revenue.

For Sirius, the loan means a temporary reprieve from its debt troubles. Analysts said the deal may have saved the job of chief executive Mel Karmazin.

Sirius had warned that it would file for bankruptcy protection if it could not find an investor to help pay the debt. A group of the company's creditors last week said that if the company filed for bankruptcy, they would likely oust Karmazin.

After down-to-the-wire negotiations, Liberty agreed to a deal and gave Sirius $250 million immediately. The loan allowed the New York-based satellite radio operator to wipe out $175 million in debt that was due yesterday. Liberty will receive 40 percent equity in the company, becoming Sirius's largest single shareholder.

Analysts said, however, that Sirius's troubles are far from over. With credit markets frozen, the company faces an additional $350 million in debt due in May and $400 million in December. The loan from Liberty will help cover most of the bonds that mature in May, and analysts said Sirius may be able to pay off the remainder through its own cash flow.

"What the deal does is buy Sirius more time and allows them to live and fight another day," said Tuna Amobi, an analyst at Standard & Poor's. "But they haven't made it completely out of the woods."

Sirius has never been profitable. The company pays huge fees for contracts with talent like shock jock Howard Stern, who receives $100 million a year. The economic downturn has led to fewer consumers buying subscriptions or new cars outfitted with satellite radios.

In recent days, Karmazin sought help from investors to stave off bankruptcy, and a potential takeover. He had been in talks with satellite entrepreneur Charles Ergen, chairman of Dish Network. But after a marathon of negotiations with potential investors, Karmazin struck the deal with Liberty early yesterday morning.

Liberty chairman John Malone and chief executive Greg Maffei will take seats on the board of directors. Liberty may gain even more seats, according to the deal. The number will be proportional to its ownership stake, which means the company could have three seats if Sirius maintains a board of 12 directors.

"We are excited to be investing in Sirius XM. We have been impressed with the company, its operations and management team," Maffei said in a news release. "Sirius XM's 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."

Analysts said it is unlikely Liberty would be interested in management of the company or dealing with day-to-day operations. Malone is known as a shrewd dealmaker, not someone interested in taking over and running the operation. They said it is more likely that Liberty would sell products and trade content between DirectTV and Sirius.

"We believe that Liberty views this transaction in primarily financial terms," according to the Barclay's note, which described the deal for Liberty as having "upside optionality and downside protection."

The loan comes with a 15 percent interest rate and will mature in December 2012. It has been structured in two stages, with conditions that could allow the lender to leave the deal before the second payment if Sirius's financial conditions deteriorate, analysts said. The companies declined to specify when the second phase of loans would be given.

As the largest single shareholder, Liberty would have more protection than other stakeholders if Sirius had to file for bankruptcy down the road, according to a research note by Barclay Capital analysts Vijay Jayant and James Ratcliffe.

Since Sirius merged with XM last July, the company's stock has plummeted from about $3.80 to 10 cents a share Friday. News of the deal with Liberty pushed Sirius shares to 16 cents yesterday.

"We are pleased to have come to this agreement with Liberty Media, particularly in light of today's challenging credit markets," Karmazin said in a news release. "This agreement enables Sirius XM to continue to develop the opportunities first outlined in the merger of Sirius and XM."

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