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Analyst: Sirius May Have to Renegotiate Content-Related Contracts to Survive

By | November 6, 2008
      [Satellite News 11-06-08] Lucrative contract offers from Sirius XM Satellite Radio to its on-air content are key drivers of the company’s reported massive debt and may have to be renegotiated before they are up for renewal according to industry analyst, Tim Farrar.
          “Now that there are no longer two players competing for that content, the amount that Sirius XM will have to pay for content will go down over time,” Farrar said in an interview with Satellite News. “The challenge for Sirius XM will be renegotiating those contracts, perhaps even before they expire and most of them are not up for renewal for some time.”
          Farrar said that Sirius XM programs and on-air personalities will have to decide whether or not they will compromise to help the company through its current economic difficulties. “The rights to Sirius XM’s sports programming will be the most difficult to renegotiate, but perhaps the company will see more willingness on the part of talk radio personalities,” he said.
          On Nov. 6, Sirius XM said it was in discussions with several financial institutions regarding a financing to replace its 2.5 percent convertible notes due 2009. The company faces $1.1 billion in loan repayments in 2009, which includes $300 million in convertible bonds in February. The company then lowered its year-end subscriber expectations from 19.5 million to 19.1 million. The company also lowered its 2009 estimate to 20.6 million from its previous figure of 21.5 million. Sirius XM said that current economic conditions and a dramatic and recent slowdown in auto sales have negatively impacted subscriber growth for 2008 and 2009.
          Farrar believes that while satellite radio still has strong potential in the long term, a combination of recent circumstances presents a serious financial challenge. “I think the real question is – how much value is there over and above the debt that they already have? The share value has been beaten down because people are not so sure about where the evaluations put on the company a year ago, when they were looking at the merger and promised cost cuts, stand today,” he said. “Those evaluations no longer apply at this time because the cost of capital has gone up so much in the last year.”
          Farrar added that for any business, evaluation that is based on long-term discounted cash flow results in lower projections. However, some frustrated investors are pointing fingers at the company’s executive management.
          On Nov. 4, Save Sirius, a group formed by 500 shareholders of the formerly independent Sirius Satellite Radio, sued the post-merger entity, charging top Sirius executives, including CEO Mel Karmazin, of intentionally sabotaging Sirius stock to purchase it privately at a low price.
          Save Sirius spokesman Michael Hartlieb asserts that Sirius shareholders have lost more than 90 percent of their value under Karmazin’s management. “We are working to gain control of our company by seeking to remove current members of the board as well as top executive Mel Karmazin,” said Hartlieb in a company statement.
          Farrar said the reasons behind the Sirius XM stock value drop are much simpler.
          “I’m sure the stockholders are terribly frustrated,” said Farrar. “But I think that the decline in the stock price revolves around the looming refinancing issue concerning Sirius XM’s debt and the timing of the issue. They have had to make the facility available to the convertible bondholders to shorten the stock. The only purchaser of those bonds were hedge funds who were buying it for technical reasons – they wanted to go long on the bond and short on the stock. Without having that facility available to people, that deal would have been impossible. It had to be done to close the merger.”
          Farrar added that at the time of the merger, the debt of then independent XM Satellite Radio was putable. “The equity value is the difference between the enterprise value of the company and the value of the company’s debt and if you increase your discount rate from 12 percent, the amount it was at the time they were pushing the merger, to say, 18 percent which is closer to the cost of capital today, the equity value is going to be squeezed. It’s as simple as that,” he said.

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