[Infowarrior] - Sirius XM Prepares for Possible Bankruptcy

[Richard Forno]

February 11, 2009
Sirius XM Prepares for Possible Bankruptcy
By ANDREW ROSS SORKIN and ZACHERY KOUWE

http://www.nytimes.com/2009/02/11/technology/companies/11radio.html?_r=1&pagewanted=print

Last summer, Mel Karmazin was rattling off his trademark one-liners to  
talk up the future of Sirius XM 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 the shock  
jock Howard Stern.

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 is 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 by Sirius XM 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 more 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, ever an optimist, had 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.

But since the summer the company’s prospects have dimmed. In December,  
Mr. Karmazin started to sound alarm bells, but he remained optimistic.

“I’m not trying to paint the rosy picture, because we have challenges  
connected to our liquidity and certainly our stock price is dreadful,”  
he said at the time. “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 deal on nearly $400  
million in annual cost savings and the potential to gain new  
subscribers through deals with auto companies. Placing more satellite  
radios in vehicles, he argued, would persuade consumers to add radios  
in their homes and boats and as portable devices.

But satellite radio failed to win over many younger listeners, and  
competition from free Internet radio, MP3 players and high-definition  
terrestrial radio began drastically slowing Sirius XM’s subscriber  
growth.