WSJ's take on the Ergen Offer

By MATTHEW KARNITSCHNIG
Satellite entrepreneur Charles Ergen put forth a $700 million proposal to take 51% control of satellite-radio provider Sirius XM Radio Inc., according to people familiar with the matter. Although it was ultimately rejected in favor of a $530 million deal from Liberty Media Corp., Sirius bondholders are still piecing together the details of the spurned bid as they determine whether the Liberty deal was the best outcome for the company.

Sirius hasn't publicly commented on Mr. Ergen's proposal or why it determined the Liberty offer was superior. The Liberty deal allows Sirius to meet its immediate cash needs without sacrificing control of the company. Mr. Ergen's proposal offered greater financial flexibility, but at the cost of corporate control and a lengthy regulatory review.

Mr. Ergen's offer consisted of $700 million in loans and restructured debt. Last fall, Mr. Ergen began accumulating a total of about $375 million of Sirius's total $3.25 billion in debt outstanding, mostly in short-term maturities. Part of his plan was to roll over some of the Sirius debt, while injecting about $500 million in new loans into the New York-based company.

Those loans would have allowed Sirius to meet its debt obligations roughly through 2012, say people familiar with Mr. Ergen's proposal. The interest rate would have been slightly lower than the 15% rate offered by Liberty, which clinched its investment deal for Sirius on Monday. As part of the plan, Mr. Ergen would have taken majority control of the company's equity, potentially putting him at odds with Sirius Chief Executive Mel Karmazin, with whom he has had a testy relationship in the past.

Under the Liberty agreement, the media holding company gets 40% of Sirius in return for $530 million in loans that pay 15% interest, all secured against Sirius assets. It is a sum that is precisely the amount of money needed to pay Sirius's debt maturities through the end of 2009. There is little margin for error, especially if the company's $300 million of expected cash flow falls short in the recession.

"This was the best offer," a person close to Sirius said, adding that the company's board didn't believe Mr. Ergen's proposal was even close to the Liberty offer.

Mr. Karmazin was in discussions with Mr. Ergen until Friday, at which point Sirius stopped engaging with him to focus on the Liberty talks, say people on both sides of the talks. Neither Mr. Karmazin nor his advisers returned to Mr. Ergen to extract better terms before signing the deal with Liberty.

In addition, a takeover of Sirius would have required a review by the Federal Communications Commission, a process that can take years. Mr. Ergen also wanted Sirius debtholders to waive change-of-control provisions.

Nevertheless, critics of the Liberty deal worry that Sirius is paying more than it needs to for loans that don't secure its long-term viability.

One major debtholder said the terms of the rival bid were superior because they gave Sirius more long-term flexibility.

In addition to the 15% interest rate, Sirius must pay Liberty a $30 million "structuring fee." Liberty's $530 investment is divided into two tranches. An initial $280 million was paid on Monday so that Sirius could repay about $172 million in bonds held by Mr. Ergen. Sirius has also paid Liberty the $30 million fee.

Liberty will provide the remaining $250 million in loans later this year under certain conditions. One key condition is that the holders of about $350 million in Sirius bank loans that come due in May agree to extend the maturity. If the holders agree to the extension, Liberty would purchase about $100 million of those loans.

The remaining $150 million, along with the balance left over from the first installment, is earmarked to repay about $230 million in Sirius debt that matures in December. Mr. Ergen holds most of the December bonds.

One way Mr. Ergen could try to scuttle the Liberty deal would be to acquire some of the $350 million in bank debt outstanding and then refuse to extend the maturity; Liberty might then back out of its deal. In that case, Sirius would likely have difficulty repaying Mr. Ergen for the December notes he holds. He could use the debt as leverage to make another attempt to seize control of the company.

Write to Matthew Karnitschnig at matthew.karnitschnig@wsj.com

Printed in The Wall Street Journal, page B1