When might chapter 11 be good for holders of common stock? Quite possibly when it involves Sirius XM Radio. I'll be honest, the reports of a potential bankruptcy filing had left me feeling baffled to say the least. It wasn't until I listened to Tyler's Take on SiriusBuzz radio and had an online meeting with Newman, this article's co-author, that revelations began to unfold in front of us. Newman had made the suggestion that perhaps the recently leaked bankruptcy filing by Sirius XM involved only XM Satellite Holdings, rather than the parent company of Sirius XM. A simple Google search on the topic revealed hundreds of such cases. As a team, we decided to investigate the possibility a bit further and a hypothesis began to develop.

In this filing with the SEC, the corporate structure of the newly formed Sirius XM makes clear that the debt of XM was to remain the responsibility of the subsidiary corporation of XM Satellite Holdings Inc. (page s-9)

"What if," we asked ourselves, Sirius XM now has the technology to broadcast both services over the Sirius network alone. This patent, issued in April 2008 demonstrates that the company has the technology to broadcast dual services. Although the patent addresses commercial vs. non-commercial, the technology could easily be adapted to broadcast separate services over different bandwidths, a technology similar to HD radio technology. This could explain Sirius XM's recent channel consolidations as well.

According to Todd Mitchell of Kaufman Brothers, Ergen may simply be after XM’s satellites. XM currently has 4 satellites in the air, along with a spare on the ground. With an average price of about 500-750 million each, XM could potentially bring in 2.5 billion dollars.

As we considered the potential further, several other questions began to arise. We considered which company held which licenses. The FCC's approval of the merger granted the transfer of Xm's license to Sirius XM Radio.

We considered the contracts held by XM with GM, Honda and MLB. Mel Karmazin had stated that he had held talks with all of XM's partners, many of whom now sit on the merged company's board of directors. Under Chapter 11, these contracts could potentially be reworked to be more cost friendly to Sirius XM. It would also be in GM’s and Honda’s best interests to do their negotiating with the current board of directors who have both of their interests in mind (after all, they are ON that board of directors) rather than a board of directors selected by Ergen, or worse yet, a judge with no business experience. It would stand to reason that the OEMs would want the factory installed XM radios to continue working.

Yet another potential clue can be found by subscribers who have been inundated with channel updates, which could in fact be firmware updates to enable the receivers of both companies to work off of the same basic system.

All of this means of course, that if in fact Sirius XM can now provide both services over the Sirius network alone, that the XM Satellites and repeater network are now a disposable asset. As most of the companies 2009 debt obligations are backed by these same XM assets, the company would be wise to use these as a means of ridding itself on the huge debt burden placed on it since the merger with XM. By simply putting XM holdings into chapter 11, Sirius will in fact eliminate 2/3 of its outstanding debt. It would accomplish this, and save its investors as well. Sirius XM currently has about $3.2 billion dollars in debt. Out of that debt, Sirius owns about $1.1 billion and XM owns the other $2.1 billion. The only debt that Sirius has due this year is the $174 million payment coming due next week. The rest of the $783 million is all XM’s.

sirius-structure

The bottom line may be that Sirius will have acquired all of XM's subscribers with the merger, and none of its debt.

Position: Long Sirius XM