Facing a US$ 175 million debt payment Feb. 17, embattled US satellite radio operator, Sirius Satellite was bailed out by mogul John Malone of Liberty Media Corp. which has substantial interests in the leading satellite DT provider in the US, DirecTV and in the satellite broadband service, WildBlue. Sirius earlier announced that if it was unable to restructure its debt or come to an arrangement with a third party, it may have to declare bankruptcy. The Malone rescue was just in time and not only did it stave of bankruptcy for Sirius but a rival bid from DirecTV’s competitor, Charlie Ergen of Echostar, who has been buying up Sirius debt.
The rescue package from Malone’s Liberty Media came at a high price for Sirius. Analysts observed that it was a classic Malone move: squeeze attractive terms from a distressed company while also thwarting a possible takeover attempt by a longtime rival. In return for lending Sirius $530 million, Liberty will receive a 40% stake in the company plus two board seats. The loan also carries a high 15% interest rate, a $30 million restructuring fee and if everything goes according to plan, Liberty will have an effective controlling stake in Sirius.
No sooner after the deal was struck was speculations were rife on Liberty’s ultimate motives, with the possibility of a triple play satellite delivery platform --DTH, Radio and Broadband under the control of one company. Liberty Media’s CEO Greg Maffei denied any possible merger between DirecTV and Sirius although he did not discount the possibility of bundling subscriptions to DirecTV and Sirius "as an opportunity down the road," during their fourth-quarter results conference call.
Media reports notably from the Wall Street Journal speculated on the motives of Liberty in acquiring control of a heavily indebted, money-losing venture like Sirius. The WSJ argued that Sirius $6 Billion of tax losses it has accumulated can be used by Liberty as deductions to cut taxes on future profits, representing a substantial savings for the company.
That Sirius’ most valuable asset is its value as a tax-shelter, does not say much about the future of satellite radio in the US. With auto sales falling due to the recession, a major source of income for Sirius since most new cars are equipped with satellite radio as standard options. Sirius and its former rival that it acquired XM Satellite are locked into multimillion dollar contracts with well-known talents like Howard Stern and Martha Stewart that the prospects of the company turning a profit anytime soon are almost nil.
Even with the 530 million loan from Liberty, Sirius is still not out of the woods yet. Another $350 million in bank loans will mature in May and $227 million, mostly held by Echostar’s Ergen will come due in December. But now at least it’s got the backing of Liberty Media to rely on.
