Liberty Loan Lets Sirius XM Take Another Deep Breath

Liberty Media has thrown struggling Sirius XM Radio a lifeline that will keep it from falling into bankruptcy.

The owner of satellite television service DirecTV has loaned Sirius US$530 million, which it will use to pay off $171.6 million in debt that came due Tuesday. The remainder of the funds will go toward general corporate purposes.

The loan bears a 15 percent interest rate and matures in December 2012. In exchange for the loan, Liberty Media gains a 40 percent stake in Sirius XM and will receive seats on its board, which will likely be held by Liberty Media CEO John Malone and CFO Greg Maffei.

Sirius XM’s stock was up 62 percent to 17 cents per share in mid-day trading Tuesday on news of the loan from Liberty Media.

Sirius XM spokesperson Patrick Reilly could not be reached for comment.

Ship Still Taking On Water

Despite the huge loan from Liberty Media, Sirius XM remains in serious trouble.

For one thing, the company still has a sizeable amount of debt on its books. For another, Sirius XM is still weighed down by expensive, long-term content contracts with partners such as radio shock jock Howard Stern, domestic guru Martha Stewart, the National Football League, Major League Baseball and NASCAR.

Stern’s deal, reported to be as large as $100 million per year, doesn’t expire until 2010, according to Colin Gillis, director of research at TheStreet.com.

“The NFL was a seven-year deal, MLB was an 11-year deal and NASCAR was a five-year deal,” Gillis told The E-Commerce Times. “[Sirius XM] will have to find a way to renegotiate these existing contracts, because it’s unlikely it can survive with the current ones.”

Now, how likely is that to happen?

“That’s the problem,” Gillis said. “In this environment, why would [any of Sirius XM’s content partners] give that money up?”

Liberty Media’s Huge Bet

Liberty Media’s move has saved Sirius XM from bankruptcy, at least for the time being, but the question remains — what exactly is it that Liberty Media is getting for $530 million?

It’s “not even getting a controlling stake,” Gillis noted. “You still have the same management [in place at Sirius]. It’s a bet on Liberty’s part that the current team will be able to make the business work. The fact that [Sirius is] teetering on the edge of bankruptcy is not a sign of a successful management team.”

However, Sirius XM’s derailment can be attributed at least in part to the year-long effort to gain regulatory approval for its $13 billion merger with XM Radio, consummated in July 2008.

“The belief is that Sirius took its eye off the ball during the merger,” Gillis said.

Whither EchoStar?

News of the loan has temporarily pushed another player in the Sirius XM story to the periphery. EchoStar, owner of the Dish Network satellite television service and Liberty Media’s chief rival, reportedly was in talks to acquire Sirius XM if it were to fall into bankruptcy.

EchoStar may have gained the most in all this.

“EchoStar still wins because they bought [Sirius] debt at a steep discount,” he said. “So they’re going to get paid off with Liberty’s money — a competitor’s money. That’s not really what they were angling for, but they’ll take it.”

EchoStar’s pursuit of Sirius XM was intriguing because an acquisition would have happened while Sirius XM was in bankruptcy.

“Bankruptcy would have allowed Sirius to restructure the onerous contracts it has,” Gillis said.

With Liberty Media now a 40 percent owner of Sirius XM, it looks as though EchoStar may be out of the game.

Not so fast, suggested Gillis.

“This is going to be a great story to track and there is going to be a lot of strategy,” he said. “If I were EchoStar, what I would do next — I would double my money on the debt that I bought. I’d turn around and buy the next tranche that is coming due.”

Whatever its next move may be, EchoStar isn’t talking. Marc Lumpkin, an EchoStar spokesperson, declined to comment for this story.

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