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