Over the weekend the rumor mill was running at full steam. The scuttlebutt on the street was that Liberty Media would give Sirius XM Radio the helping hand that they needed as some major debt due to Charles Ergen was coming due. The main question on every one's mind was when an official announcement would be made.
Today, that announcement came, and Mel Karmazin remains in control of Sirius thanks to about $530 million worth of funding from Liberty Media in return for a substantial stake in the company.
The deal is not inexpensive, but in this credit environment, what else could be expected. In the first part of the deal Liberty will loan Sirius XM Radio $280 million, with $250 million of that funded today, just in time to pay off the debt owed to Ergen. The interest on the loan will be 15% and gives Sirius XM breathing room until 2012.
Because of the structure of the company, the next step in the process with Liberty involves a loan to XM Satellite Radio (the surviving entity as a result of the merger) of $150 million . In addition, Liberty agreed to offer to purchase up to $100 million of the loans which are outstanding under XM Satellite Radio's existing credit facilities.
So what is the cost aside from the interest rate? Liberty investments will receive 12.5 million shares of preferred stock which is convertible into 40% of the common stock of Sirius XM Radio. Effectively, Liberty will become the largest shareholder in the company, and win themselves seats on the Board of Directors.
Greg Maffei, president and CEO of Liberty stated, "We are excited to be investing in Sirius XM. We have been impressed with the company, its operations and management team. Sirius XM's ability to grow subscribers and revenue in a difficult financial and auto market is indicative of how listeners view this as a "must have" service."
For his part, Sirius XM's Mel Karmazin said, "This agreement enables Sirius XM to continue to develop the opportunities first outlined in the merger of Sirius and XM. By strengthening our capital structure and enhancing our financial flexibility, this investment allows us to continue providing the great content and innovative programming our subscribers know and love."
In simple terms, the company has been able to stave off a take-over bid from Ergen as well as secure the funding needed to keep the bankruptcy option at bay. With liquidity in hand, the company can concentrate on bringing about merger synergies, and getting the company to a profitable position. The 2009 debt had been a major overhang on Sirius XM, and became a focal point not only to investors, but the company as well. With the issue resolved, the company can get down to being in the satellite radio business rather than the seeking funding business. This alone is good news for both the street as well as satellite radio consumers.
The Ergen camp has remained quiet so far today. Ergen made a move and in the end he will make a fair amount of money on the deal. However, at this point Ergen will fall short of getting control of Sirius XM Radio. Liberty, has a stake in DirecTV, the main competitor of Ergen.
Position: Long Sirius XM Radio