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Sirius XM Is Dealmaker Karmazin’s ‘Tough One’ in 40-Year Career
By Cécile Daurat and James Callan
Feb. 14 (Bloomberg) -- Mel Karmazin pushed Sirius shares to $6 when the company announced his hiring in November 2004. Now his combined Sirius XM Radio Inc. faces bankruptcy and the stock is trading at about 10 cents.
Over a career of more than 40 years, Karmazin, 65, drove radio-advertising sales teams to produce double-digit gains, regardless of economic conditions. He orchestrated mergers that reshaped the radio industry and befriended talk-show host Howard Stern. As president of Viacom Inc., under Chairman Sumner Redstone, he oversaw the Paramount film studio and CBS network.
“In the past, it has never paid to ultimately short Mel, but this is a tough one,” Bishop Cheen, a bond analyst at Wachovia Securities in Charlotte, North Carolina, said in a Feb. 10 interview. “This is absolutely his biggest challenge.”
Karmazin took over at New York-based Sirius after clashing with Redstone because he couldn’t get the top job at Viacom, one of the world’s largest media companies. Sirius, a pay-radio business, had started airing about two years earlier. The company said yesterday it may file for protection from creditors as early as Feb. 17 if it can’t reach an agreement to refinance debt.
On that day, Sirius XM must repay $175 million in bonds held by EchoStar Corp., the satellite group run by Charles Ergen. EchoStar bought some of Sirius XM’s debt after the company turned down an unsolicited takeover bid, according to a person familiar with the plan. Karmazin is also in talks with John Malone’s Liberty Media Corp., which controls DirecTV Group Inc., about a possible transaction, people with knowledge of that matter said.
The New York Post reported last night that Malone has offered Sirius a bridge loan of several hundred million dollars to pay the debt maturing next week, citing a person close to the situation.
Negotiating Leverage
“This is as weak as Karmazin’s negotiating leverage has been, probably in his whole career,” Tuna Amobi, a Standard & Poor’s analyst in New York who has been following the industry for 10 years, said Feb. 11.
Sirius XM has traded below $1 on the Nasdaq Stock Market since September, when investors became concerned that Karmazin wouldn’t be able to manage the debt or meet growth projections.
In August, Karmazin said Sirius XM could increase revenue even as carmakers struggled because a growing proportion of new cars were equipped to receive satellite-radio transmissions. In November, the company cut its forecast for 2009 subscriber growth by almost a million, partly because the collapse of the U.S. auto industry cut demand for radios pre-installed in cars.
‘Tough Task’
“This has been a much harder hill to climb than he expected,” Tom Taylor, executive editor of Radio-Info.com, an industry-trade Web site said Feb. 8. “This has been a very tough task for him and he is a gifted businessman and a great dealmaker.”
Taylor, based in Chicago, has written about the radio business for 20 years.
Patrick Reilly, a spokesman for Sirius XM, and Marc Lumpkin, an EchoStar spokesman, declined to comment.
Karmazin, who presided over Sirius’s $2.76 billion all-stock purchase of XM last year, said afterward that he had made an “ugly” debt deal to finance the merger. Sirius XM waited 1 1/2 years to get approval from the U.S. Federal Communications Commission. Sirius assumed more than $1 billion in debt for the deal, which closed after the credit crisis had taken hold.
Karmazin began his career in radio ad sales in 1967. While chief executive of Infinity Broadcasting Corp. in 1996, he persuaded Westinghouse Electric Corp., later renamed CBS, to take over Infinity. He became president of Viacom after that company acquired CBS for $43.4 billion in 2000.
‘Dynamic’ Leader
“I would never bet against Mel,” David Pearlman, a former senior vice president at CBS Radio, said in a Feb. 6 interview. “He’s one of the most dynamic leaders I’ve ever been around,” said Pearlman, who worked for Karmazin for about four years.
Karmazin wanted to be CEO of Viacom, Redstone wrote in a 2001 book. He resigned in June 2004, frustrated by the performance of units including the radio stations and the declining stock price, Redstone said at the time.
Howard Stern said then he was “shocked” by Karmazin’s departure, calling it a “coup d’état.” Karmazin had helped Stern get hired in 1985 after he was fired at WNBC-AM radio.
Karmazin, who didn’t have a no-compete clause in his contract, was viewed as a candidate to run other media companies. Roy Disney, who was seeking to oust Walt Disney Co.’s then-CEO Michael Eisner, said the entertainment company should consider Karmazin as a replacement.
“I would never count Karmazin out,” James Goss, an analyst at Barrington Research Associates in Chicago, said Feb. 11. “He’s been pretty forceful in having his positions felt and he’s not likely to fade away after this shakes out.”
NFL, Howard Stern
On Nov. 19, 2004, the day after Sirius XM announced Karmazin’s hiring, the shares rose 9.5 percent and pushed the company’s market value to $6.53 billion. As of yesterday, the market capitalization was about $400 million.
Sirius and XM spent hundreds of million of dollars on programming including the National Football League, leading to losses.
Stern joined Sirius a month before Karmazin did, after 30 years in free broadcasting. His five-year agreement, which began in January 2006, cost $500 million and included stock-based incentive payments based on subscriber goals.
“Do I think it will survive? I do,” Stern said about Sirius XM on his Feb. 11 program after reading newspaper clips saying it may file for bankruptcy. Stern said he hadn’t talked to Karmazin. “He must have a plan,” Stern said.
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