Sirius Fights To Avoid Bankruptcy

U.S. satellite radio operators are facing real funding problems right now. Interspace recently reported that XM Satellite Radio might need an extra $600 million to reach cashflow breakeven. It now appears its main competitor, Sirius Satellite Radio, is also in trouble and that a bankruptcy filing cannot be dismissed out of hand. Sirius’ recent financial performance has left many wondering whether the satellite radio operator has a future. In its recent results, the operator announced it had only 3,347 subscribers as of June 30.

According to William Kidd, a satellite equity analyst at Lehman Brothers, “We set low subscriber targets, but not this low. Although in line with management’s earlier guidance of ‘several thousand’ subscribers, Sirius’s 2Q subscriber tally of 3,347 was … below our 4,500 estimate. We are keenly aware that the product limitations, both in breadth and availability, are constraining sales. Nevertheless, we find the company’s continued lacklustre subscriber growth an issue, given its competitor is doing far better and that the satellite radio business model is predicated on almost exponential growth.”

Sirius could have serious funding problems. Marc Nabi, a satellite equity analyst at Merrill Lynch, said in a research note: “Management noted the potential for debt-to-equity swaps, additional capital outlays by existing investors Blackstone Group, Apollo Partners or major equity holders, and new strategic funding. All roads lead to significant dilution to current equity holders should funding ultimately become available.” The funding issue is critical to Sirius’ future; it seems to be pinning its hopes on gaining more funds from Blackstone and Apollo Partners.

While many believe the satellite radio model can be successful, it appears both Sirius and XM are approaching a very difficult period in terms of addressing their funding needs. Kidd says: “In the past, we always had considerable confidence that funding would be available. Today, based on the state of the markets, as well as the share and debt prices of both operators, it is easy to conclude that the market collectively is assigning a very high probability to the likelihood of a negative liquidity event. The sentiment change has made the prospects poor for acting in the public equity or debt markets. Looking at the present situation as realistically as possible, the potential for salvation seems to rest with a handful of strategic investors whose motivations are not known.”

Nabi also paints a bleak picture. “We reiterate our intermediate-term reduce/sell rating on Sirius following unimpressive 2Q results, unconvincing fundamental outlook and uncertain funding prospects.”

–Mark Holmes