Is EchoStar Looking to Get Sirius?
The news that EchoStar is grabbing hold of Sirius XM debt has not been taken lightly. Reports began to surface on the subject late yesterday afternoon and this morning’s Wall Street Journal confirmed the news. This latest development has sent the stock upwards quickly on heavy volume and had many on the street taking a trip down Speculation Street and Guesstimate Lane as people were trying to figure out the strategy in the EchoStar move.
There are several factors at play here. The obvious one is that EchoStar may want a piece of Sirius XM, and controlling their debt is the mechanism to make that happen. With credit being tighter than ever, the company may be forced to swap equity for debt. Recently, 100,000,000 shares were issued to take away $13 million in debt. The February debt is not the issue here that is newsworthy in my opinion. If Sirius XM had to they could likely pay the remaining $175 million with cash. The real story is whether or not EchoStar is buying up the May debt.
The thought of debt for equity swaps is one path for EchoStar to exert control. $100,000,000 of debt could bring 700,000,000 shares to the table at a fixed price. If EchoStar were to attempt to buy that level of shares on the open market, the stock would climb, and the cost to acquire the shares would rise with it. Should there be a default that forces Sirius XM into bankruptcy, EchoStar would be a major creditor, and gain some control.
Why would EchoStar want Sirius XM anyway? Speculation is all we have but, perhaps they see that Sirius XM is still exhibiting top line growth, and there is a potential for that to continue. Perhaps they see the company being able to use more bandwidth for backseat television, and want to up the ante in mobile television. Or, perhaps they simply feel that the prospects of Sirius XM are strong enough that the debt they buy will make EchoStar money.
Mel Karmazin, Sirius XM’s CEO, has had business dealings with Charles Ergen of EchoStar in the past and Joe Clayton, the former CEO of Sirius, sits on the EchoStar Board of Directors. Clearly these parties are well acquainted and it would not be a real stretch to see that they are working together on something.
No matter what the speculation is, there is one thing that seems to ring true. Ergen and EchoStar would not make this move unless they thought it would benefit them. The debt is likely the safest way for EchoStar to make their move given the leverage that is provided.
This news comes several days ahead of the expiration of the February Debt on the 15th. Certainly, the next week will be very interesting in that there are only six trading days left before the debt is due. Sirius XM has expressed that they are working many channels on taking care of their debt issues, and that they hoped to have a resolution or direction by March 1st.
All in all, this news shows an interest in the debt for one purpose or another, and the equity is responding accordingly.
Position: Long Sirius XM Radio
I’m not expert on this stuff, but I don’t see how a bankrupcy is the best option for EchoStar. Sirius XM is almost profitable and has 20 million+ paying subscribers. Partnerships and synergies between the two make sense, but why would EchoStart Pursue bankrupcy which would result in the loss of countless subscribers, just to aquire some of their assets?
I ask this…Why does bankrupsy make more sense that working with Sirius XM or simply aquiring them without bankrupcy?
If you think this company is worried about the loss of a couple thousand hardline subscriber’s/shareholders in a Reorganization. You are only fooling yourself.
Besides, most of these hardline shareholder/subscribers probably already have long term subscriptions that are pre-paid. Or if not, they have recently done so to avoid the price increase.. Bet you hadn’t thought about that angle?
They file BK and the debt largely disappears and so do the common shareholders. If you think for one moment that EchoStar wants that kind of debt on their books. You’re dillussional .
For this company to file BK. They are gonna need a couple of quarters of operating cash to get through the BK process. If they took their Cash on Hand to Retire their March debt. They would not have funds to continue operations, and would need to seek DIP. Which would be really ugly.
Anyone buying debt in a company in this bad of shape is looking at Post Reorganization play.
Although the “experts” here will tell you the Feb. debt is not the issue, because they can pay it in cash, need a bit of a reality check. If you pay your Feb. debt in Cash, then how are you going to pay that 60 million CASH in March to MLB? Not to mention the annual Copyright Royalty Board payment that are due in March for both companies.
Not only do they need to refi their existing debt. They are going to need some more cash to make these annual payments without drawing cash on hand down to ZERO.
Maybe some of the experts can splain’ away the 100 or so million in cash that is going to be necessary in March for contractual royalty and content payments?
And so it goes,
PCSTEL
i agree–There are 20 millions subs that some could be turned into Dish subs–I see much more potential for cash flow with Dish using these paying customers to their advantage
I havent heard anything from Sirius–Perhaps a filing in the next couple of days could shed some light on this? I dont think anyone knows for sure yet
If push comes to shove regarding the May debt, and Sirius XM is unable to get financing for that, isn’t it logical to reason that they could do a reverse split. Then, with the stock price higher, couldn’t they then sell stock into the market to raise cash to pay off that debt? All this, of course, is in case they are in danger of not being able to pay the May debt, when due. If my reasoning is correct (and I welcome comments on this), isn’t it logical to assume that EchoStar is buying the debt they are currently buying for a reason other than the potential bankruptcy of Sirius XM, and EchoStar’s taking over part or all of Sirius XM?
Also, would the FCC and Justice Department allow EchoStar to own and run Sirius XM?
What are everyone’s thoughts on these questions?
The FCC would not allow Dish and Directv to merge. Their could be problems with Sirius XM and EchoStar. However, since the FCC is in bed with the NAB, they would certianly approve the merger if it meant less competition to terestrial broadcasters.
With Sirius XM on the verge of turning a profit, and the fact that their subscriber base is actually growing in this environment, I’ve got to beleive that EchoStar would want to leverage Sirius XM rather than disrupt the good things that are finally geling.
Steve, May debt is already financed debt (i.e. it’s already a bank loan) that they are likely able to push out to next year. That’s why I’m not sure why people are so up in arms about the May debt. Isn’t the Dec debt more toxic anyway? Assuming Feb and Dec debt is handled, I see no reason why they wouldn’t be able to handle the pushed May debt in 2010.
IMO Mel got Echostar to pay some 2/15 debt holders cash because they would not take converted stock. Goldman Sacks(GS) has about 142 million of the Feb debt; and they would not allow Echostar to steal the company from them. GS would short DISH to zero!
The Shorts got some phony press to allow themselves to cover cheap.
I agree with the King. There is no way that Charlie Ergen is going to walk in, pay cents on the dollar for debt, and walk away with control. Lets not forget the other institutional holders out there with tens of millions of shares of Sirius stock, the big banks among them. No way they need to have additional losses on thier investment. So to me this is purely a play to get something that Ergen needs, like a reduction in operating costs of satellites. In case anyone hadnt noticed, his company isnt doing so well, big time losses, and Echo Star also lost out to Directv with AT&T not so long ago.
Is it possible that there is some joint venture in the works between Sirius XM and EchoStar – one that is outside the areas the FCC would find problematic – one that would benefit both companies?
Some on this board do not see EchoStar coming in and scooping up Sirius XM on the cheap. I’d like to believe they are right and, if so, what is the motive of EchoStar investing their money at this time?
Anyone have any ideas?
AT&T and DirecTV announced a partnership earlier this week that
replaced a previous agreement AT&T has had with DISH Network since 2003. At this years CES, AT&T announced CruiseCast.
Remember the Satellite Entertainment Alliance.
This was SIRI, Dish and Radio Shack in 2004.
This all sounds like a new agreement to defend themselves.
Mel has been fuzzy about the future of its Mobile Video Services. I hear Echostar knows video.
I remember when Clayton was elected to the BOD of Echostar, back then I had commented that his appointment would have a connection to Sirius. Tyler disagreed with me. Looks like you may have been wrong, Tyler.
If this is true, then the triangle would be complete. Mel-Black-Clayton. It now appears that Echostar has been shorting SiriusXM and are probably responsible for the current PPS. This has been a long time plan that is now coming into fruition. The plan of BKing the company is more greater now than ever. Using Echostar as the culprit lets Mel sought of off the hook. Folks, it is time to wake-up and take the rose colored glasses off. The shareholders are about to get &*^%#$.
It just feels like something does not add up with this situation. I’ve been thinking about it all day and I can’t really put it together.
Why would this news come out now? And it’s all so vague, yet sinister sounding… it smells of bad reporting.
Lets say you were Echo, you would want to keep this news hush hush until you had as much debt as possible. So far there is only a max of $175 million in Feb debt left, and reports say that Echo has a part of that (lets say $100 million).
Now for the other May and December debt, it’s trading so low, why would the holders sell? Any holder would know that Sirius has enough cash to pay off the Feb debt (that’s why the Feb debt was always trading near par) and the holders would at least wait until after the Feb debt date to sell.
And why would the holders sell the debt at 30 cents on the dollar when Sirius would likely convert their debt into shares of the company (thereby giving them a huge equity interest in the company) and since the company would eliminate most of the 2009 debt with the equity, it would be safe until 2011,( fcf positive by 2011) and thereby would seem to be a not so bad investment?
very odd
Echo Star would only buy the debt for a couple of reasons that I see.
1. SiriusXM is a great investment.–Absolutely not under the current conditions, Unless something is in the works as Tyler pointed out.
2. Echo Start wants to drive them into BK.–Either way we just sit back and watch it all unfold.
Mel has said all along that he would prefer to service the debt sooner then later. Well..it is later and Mel is all out of sooner.
imho
Vaporgold
Maybe Sirius is selling Echostar some equipment (like a satellite) in exchange for buying up their debt at a discount. Just cause Sirius can not buy their debt in the open market does not mean someone else can’t. They exchange the debt position for the equipment and everyone is happy. I think mobile TV partnership is an absolute possiblity. Maybe even mobile internet services.