The news agencies are buzzing over a potential takeover bid by Echostar for Sirius XM. The Wall Street Journal initially reported that Echostar CEO Charles Ergan has been quietly buying up Sirius XM debt. Internet bloggers have jumped all over the story and have created mass confusion for investors in Sirius XM.
There is so much misreporting underway, that there no longer seems to be clarity as to exactly what it is Mr. Ergan is actually buying. The Wall Street Journal has made it abundantly clear the Mr. Egan has been buying the Feb. 17 convertible debt. As the stock began to rise on that news, other agencies began reporting that he was in fact buying Sirius XM bank debt instead, and have created some outlandish stories around the topic.
We have also learned that if in fact Mr. Ergan is making a play for Sirius XM, that all of the outstanding debt if it were bought and converted to equity would give Mr. Ergan only 18% of Sirius XM, which would require open market purchases to be made to give him a majority stake.
All of these "would be-could be" scenarios have a common thread. They all assume that Sirius XM is going to default on its February and/or May debt obligations, and therein lies the main problem with the focus of this weeks events. No one has stepped back and questioned that perspective. No one that is, except yours truly.
Here's another perspective that does not involve conspiracy theories. To begin with, Echostar is not buying the debt. Mr. Ergan is. Having worked for a bond firm myself, my first thought was not that Mr. Ergan was making a play for Sirius, but was simply making a good investment. The convertible bonds were trading nearly 20% below par. If Mr. Ergan believes as I do that Sirius XM will in fact meet its debt obligations, buying these bonds is simply a sound investment decision.
A wise investor, who dare I say may be in a position to have this sort of knowledge in advance would be wise in making a near 20% profit in only a few short weeks when these purchases were made. Further proof of this may be found in the bonds themselves, which are trading at a premium of 105 and offer a very large negative yield. Typically, bonds that are about to be defaulted on do not trade at a premium, but rather a substantial discount as bondholders look to unload them as one would a used car.