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Is Sirius XM Veering Into Oblivion?

Is Sirius XM Veering Into Oblivion?

Fresh off a hard-fought merger, Sirius XM Radio appears to be headed for bankruptcy. The satellite radio company had to restructure its debt in order to complete its merger, but the high startup and operating costs it faces may be too much. The company's stock was down to 6 cents on Wednesday.

By Jeff Meisner
02/11/09 11:37 AM PT

Shares of Sirius XM Radio plummeted by nearly 50 percent in mid-day trading Wednesday on rumors that the troubled Internet radio company is preparing to file for bankruptcy.

Sirius is best known for offering subscribers commercial-free music, sports, news and talk radio programming, including Major League Baseball, the National Football League, shock jock Howard Stern and popular domestic guru Martha Stewart.

However, the high price tags associated with providing that content, combined with a deteriorating balance sheet and the year-long U.S. recession, have hit Sirius hard.

Slowing Growth

Despite subscribership that grew by 17 percent in the quarter ended Sept. 30, 2008, the rate of subscriber growth slowed substantially. Sirius netted 344,081 new subscribers during the quarter, down 59 percent compared to the 839,750 netted during the same period the year before.

Sirius spokesperson Patrick Reilly declined to comment for this story.

The company's stock was down 47 percent to 6 US cents in mid-day trading on Wednesday.

Series of Setbacks

Reports that Sirius has retained the services of a bankruptcy attorney were met with caution on Wall Street.

"To secure the services of bankruptcy attorneys doesn't mean the filing of a bankruptcy is next, though it well could," said James Goss, vice president and senior investment analyst at Barrington Research. "However, if the story is true, it's prudent to make sure you have the proper counsel."

Sirius' problems did not form overnight. Rather, they are the result of a series of setbacks that have plagued the company since its $13 billion merger with rival XM Radio, which was approved by the Federal Communications Commission in July 2008.

For one thing, both Sirius and XM had sizeable amounts of debt on their books as a result of making huge investments in the satellite technology that enables the company to broadcast to its listeners, Goss told the E-Commerce Times.

Then, in an effort to gain an upper hand in the market, both Sirius and XM aggressively sought high-priced programming such as Stern, Stewart and NASCAR to lure subscribers, he said.

Merger Effects

In February 2007, the two companies announced they would merge in a deal that was valued at $13 billion at the time. The merger was expected to save the combined company about $400 million annually.

However, the merger ran into roadblocks almost as soon as it was announced. The National Association of Broadcasters objected to the deal on the grounds that it would be anticompetitive and would hurt the consumer, Goss said.

"The whole thing was put on hold for a year," he noted, and the FCC didn't approve the deal until just last summer.

When the merger was approved, Sirius had effectively acquired XM and was forced to refinance XM's debt to close the merger. Sirius was also under pressure to refinance the debt quickly to avoid any new action by the National Association of Broadcasters that might stay the deal.

"That would have put it in limbo all that much longer," Goss said. "So, they took terms that weren't the best on the refinanced debt in order to close the door."

Credit Markets Shut Down

Unfortunately for the now-combined company, the deal closed just as the credit markets closed in the wake of the collapse of once-mighty investment bank Lehman Bros. and the subprime mortgage crisis.

"Now, the ability to redeem the debt on favorable terms has gotten very challenging," Goss said. "The stock declined, reflecting that, which has exacerbated the whole thing because the market cap is well below the level of debt on the books, so they can't do debt-equity swaps."

EchoStar Interest?

With Sirius XM seemingly on the ropes, speculation has swirled that satellite television giant EchoStar, which already owns a considerable portion of Sirius XM's debt, might make a move to acquire the beleaguered company.

"It certainly looks like EchoStar wants to acquire [Sirius XM,]" Goss said.

If it does, EchoStar isn't talking.

Company spokesperson Marc Lumpkin declined to comment on speculation that EchoStar is in the mix to buy Sirius XM outright or a portion of its assets.


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