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Liberty Media Outmanuvers EchoStar to Save Sirius XM

By | February 18, 2009
      [Satellite News 02-17-09] Liberty Media Corp. signed a last-minute agreement to loan Sirius XM Radio the funding it needs to avoid bankruptcy, beating EchoStar to a deal it had been aggressively pushing for as the possible demise of Sirius XM’s moved closer.
          EchoStar had been banking on Sirius XM defaulting on loans due Feb. 17 by buying the satellite radio operator’s debt and hoping to gain control of the company. Liberty, led by Chairman John Malone and CEO Greg Maffei, former CFO of Microsoft, took a different strategy, promising to invest an aggregate of $530 million in the form of loans to Sirius XM and its subsidiaries in an attempt to save the satellite radio provider from bankruptcy.
          Facing criticism from investors over the company’s post-merger strategy, specifically for not refinancing the company’s debt before the economic recession took full effect in September, Sirius XM CEO Mel Karmazin led the negotiations. “We are pleased to have come to this agreement with Liberty Media, particularly in light of today’s challenging credit markets,” Karmazin said in a statement.
          Liberty said the funding will come in two phases. The first phase includes a $280 million senior secured loan from Liberty to Sirius XM — $250 million of which will be funded immediately. Sirius XM said the proceeds of that loan will be used to repay $171.6 million of its maturing 2.5 percent convertible notes due Feb. 17 and will be used for general corporate purposes, including working capital and transaction costs. The second phase provides an additional loan of $150 million to XM Satellite Radio, Sirius XM’s wholly owned subsidiary. Liberty has also agreed to offer to purchase up to $100 million of the loans outstanding under XM Satellite Radio’s existing credit facilities from the lenders.
          In exchange for the loan, Liberty will receive an equity interest in Sirius XM. Upon completion of the second phase of the Liberty investments, Sirius XM said it would issue Liberty an aggregate of 12.5 million shares of preferred stock convertible into 40 percent of the common stock of Sirius XM. Malone and Maffei will join the Sirius XM board. 
          In a statement to the press issued shortly after the agreement was reached, Maffei revealed that Liberty had been contemplating the move and studying its potential asset. “We have been impressed with [Sirius XM], its operations and management team,” said Maffei. “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.”
          Karmazin said he was impressed by Liberty’s offering. “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.”
          Sirius XM announced it was in discussions with several financial institutions regarding financing to replace its 2.5 percent convertible notes due 2009 as early as November. Sirius XM even lowered its year-end subscriber expectations from 19.5 million to 19.1 million citing current economic conditions and a dramatic slowdown in subscriber additions through automotive channels. The company then reported a strong 2008 third quarter with pro forma revenue increases of 16 percent from the same quarter in 2007, subscriber increases of 17 percent and a 64 percent improvement in the pro forma adjusted loss from operation at $37 million.
          In Sirius XM’s third quarter release, Karmazin said the company was able to provide long-term financial and operating projections based upon slower auto production and greater cost savings and anticipated positive free cash flow of $1 billion in 2012.
          EchoStar spokesman Mark Lumpkin declined to comment on the Liberty-Sirius XM agreement.

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