Sirius XM Sends Signals of Change
CEO Karmazin Seeks Revamped Financing and Subscriber Options for Satellite Radio

By SARAH MCBRIDE
September 15, 2008; Page B1

With satellite radio's growth slowing and Wall Street rattled, Sirius XM Radio Inc. Chief Executive Mel Karmazin last week joked at an investor conference about how difficult it is to refinance some of the company's debt on reasonable terms. "Am I going to lend the company the money?" Mr. Karmazin asked. "I hope not. I hope we don't get to that."



Bloomberg News/Landov

CEO Mel Karmazin must shore up investor confidence.

Sirius XM shareholders weren't in the mood for wisecracks. Since the merger of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. in late July, the company's stock has fallen about 40%, and now trades at less than a dollar. The downward trajectory accelerated last week after the company issued subscriber forecasts that fell below analysts' expectations and failed to reassure investors about looming debt payments.

In an interview, Mr. Karmazin conceded that his comments about the company's debt were flippant. "I wish I didn't say it," he said. "I tend to be candid. I said something off-handed. I wish it was as simple as that." Ultimately, he says there has been "a tremendous overselling of the stock" and that his company "is heading toward making a bunch of money in the future."

The merger of Sirius and XM was supposed to build confidence in satellite radio, in which subscribers pay a monthly fee for programming that is delivered through special receivers. But already, the normally cocksure Mr. Karmazin is on the defensive about satellite radio's prospects.

The months ahead will be a crucial proving ground. Sirius XM hopes to regain traction with consumers during the holiday season with its first programming packages and radio receivers that combine the Sirius and XM services. As an enticement to consumers who tried satellite radio but didn't stick with it, Mr. Karmazin has considered a plan to reactivate the radios of lapsed subscribers and give them a small selection of programming free of charge.

Meanwhile, Mr. Karmazin's focus is to shore up investor confidence by refinancing $300 million in convertible bonds that come due in February, replacing them with bank debt. Last week, he told investors that he had already begun a series of meetings with banks. "They didn't want to hear that we're having discussions," Mr. Karmazin said. "They wanted it done." While the refinancing is a priority, Mr. Karmazin says he wants to arrange it at favorable terms; the last time he renegotiated debt in a hurry -- in July, the day before the merger closed -- the stock price dropped 16%. On the consumer front, the company is currently negotiating with big retailers like Best Buy and Circuit City to ensure top-notch placement and promotion for its product over the key holiday sales season. The retail market has been dead for well over a year, Mr. Karmazin said, because of confusion over the Sirius-XM merger.

The company will soon introduce radios that allow consumers more flexibility in the programming, including a 50-channel plan that costs $6.99 a month. Sometime next year, radios that can play the entire lineup from both Sirius and XM will hit the market.

Starting next month, even those who don't upgrade their radios will be able to pay an extra $4 a month and get a few "best of" channels from the other company's service. For example, a current XM subscriber will be able to get Howard Stern and Martha Stewart, now exclusively on Sirius.

One potential use for inactive radios: zapping a limited selection of programming to them. "That would be a very efficient use," says Mr. Karmazin, adding the company has considered the move but currently doesn't have plans to implement it.

Given Sirius XM's low stock price, Mr. Karmazin said he would love to take the company private. But given the state of the credit markets, "How do you find [the money] today?" If the company were generating positive cash flow, which he expects it to do for the full year in 2009, privatization would become much more feasible, he says.

Talk-show host Howard Stern's five-year, $500 million pay package, announced in 2004, included 34.4 million shares payable to him and his agent, Don Buchwald. Then, the shares were worth about $110 million; by the time he joined the company in 2006, they were worth more than $220 million because of the stock's sharp rise. Today, those shares would be worth $32.6 million. Mr. Karmazin declined to comment on Mr. Stern's current holdings; Mr. Buchwald wasn't available for comment.