The New York Times
February 11, 2009 Wednesday
Late Edition - Final
Section B; Column 0; Business/Financial Desk; Pg. 1
780 words
Satellite Radio Company Sirius XM Prepares for Possible Bankruptcy
By ANDREW ROSS SORKIN and ZACHERY KOUWE
Last summer, Mel Karmazin was rattling off his trademark one-liners
to talk up the future of SiriusXM Radio, the combined company he ran
that had just been blessed by regulators.
He was planning to cut costs and expand a business that was already
a fixture in the lives of millions of Americans. ''Forty-three cents
a day -- it's not even vending machine coffee,'' he said at the
time, parrying a question about whether the softening economy might
hurt subscriptions.
But now Sirius XM, the satellite radio company, has problems with
much bigger price tags. It has hired advisers to prepare for a
possible bankruptcy filing, people involved in the process said.
That would, of course, be a grim turn of events for the normally
upbeat Mr. Karmazin, Sirius XM's chief executive, who had hoped to
create a mobile entertainment juggernaut with stars like Howard Stern.
It is unclear how a bankruptcy would affect customers. Service is
unlikely to be interrupted, but the company might have to terminate
contracts with high-priced talent like Mr. Stern or Martha Stewart.
A bankruptcy would make Sirius XM one of the largest casualties of
the credit squeeze. With over $5 billion in assets, it would be the
second-largest Chapter 11 filing so far this year, according to
Capital IQ. The filing by Smurfit-Stone, with assets of $7 billion,
has been the year's biggest to date.
Sirius XM, which never turned a profit when both companies were
independent, is laden with $3.25 billion in debt. Its business model
has been dependent, in part, on the ability to roll over its
enormous debts -- used to finance sending satellites into space and
attract talent like Mr. Stern (who was paid $100 million a year) --
at low rates for the foreseeable future until it could turn a profit.
The company's success and failure are also tied to the faltering
fortunes of the automobile industry, which sells vehicles with its
radio technology installed and represented the largest customer base
among Sirius XM's 20 million subscribers.
Sirius XM owes about $175 million in debt payments at the end of
February that it is unlikely to be able to pay.
Sirius XM's problems could pave the way for a takeover by EchoStar,
the TV satellite company, which has bought up Sirius XM's debt.
Mr. Karmazin has been locked in talks with EchoStar's chief
executive, Charles W. Ergen, over Sirius XM's options, people
involved in the talks said. The men are said not to get along, these
people said, and Mr. Karmazin had rebuffed Mr. Ergen's takeover
advances before.
Sirius XM hired Joseph A. Bondi of Alvarez & Marsal and Mark J.
Thompson, a bankruptcy lawyer with Simpson, Thacher & Bartlett, to
help prepare a Chapter 11 filing, these people said.
Documents and analysis are close to completion and a filing could
come in days, according to a person familiar with the matter.
The threat of bankruptcy could also be part of a negotiating dance
with Mr. Ergen, who could decide to convert his debt into equity
instead of demanding payment.
In addition to the $175 million due in February, EchoStar also owns
$400 million of Sirius XM's debt due in December. If Sirius XM files
for bankruptcy, EchoStar could seek in court to take over the
company. Mr. Ergen, however, may be able to negotiate to convert his
shares before bankruptcy at an attractive rate and gain control of
the company, these people said.
For Mr. Karmazin, the sale or bankruptcy of Sirius XM would be one
of his first failures. He founded Infinity Broadcasting, sold it to
CBS and later merged the combined companies into Viacom, where he
had a notoriously difficult relationship with Sumner M. Redstone,
the chairman, before being ousted.
Mr. Karmazin bought two million shares of Sirius XM at $1.37 a share
in August. Before that, he had bought 20 million shares at an
average price of $5 each. On Tuesday, Sirius closed at 11.4 cents a share.
Since the summer, the company's prospects have dimmed.
''I'm not trying to paint the rosy picture, because we have
challenges connected to our liquidity and certainly our stock price
is dreadful,'' Mr. Karmazin said in December. ''But, you know, our
revenues are growing double digits. We're growing subscribers. We're
not losing subscribers.''
A spokeswoman for Mr. Karmazin declined to comment. A spokesman for
EchoStar could not be reached.
Mr. Karmazin staked the success of the merger on nearly $400 million
in annual cost savings and the potential to gain subscribers through
deals with auto companies to put satellite radios into cars.
But satellite radio failed to win over many younger listeners, and
competition from other sources slowed subscriber growth.
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