Liberty Media Salvage Operation - Part Two

Deal with the devil

Sirius XM CEO Mel Karmazin took his big combined company right to the brink, played chicken with billionaire media barons and came out with his job... for now. Curly R concludes its two part series on the Sirius bailout.

Part One: Not Even Close
Part Two: My Enemy's Enemy

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Mel Karmazin is a smart business man and a man who knows how to play with a weak hand, and a man also so proud that he does not want to out like dat. Instead of letting Sirius XM, the company he rode into the ditch get yanked out from under him, Mel did a deal with his enemy's enemy. Rather than permit Charles Ergen and EchoStar gain control of the company, possibly to suck the spectrum out of the business and cast aside the husk, Mel went to John Malone at Liberty Media, operator of the DirecTV satellite TV network and Dish Network's arch rival.

Did I forget to mention that Dish Network and DirecTV tried to merge back in 2001 and were rejected? Since then Charles and John have not been, er, close.

So to save himself from a takeover, getting fired and possibly seeing his company vanish as the spectrum was repurposed to mobile video, Mel gave up what eventually will be 40 percent of Sirius XM, two seats on the Sirius XM board, for the cash to get the company through this crisis, but not even necessarily the next one. Details:

Liberty Media will invest up to 530 million dollars into Sirius XM. The money will be split across current debt obligations (that pesky 170 million), the purchase of XM's debt (as defined separately from Sirius'), cash for operations and another future 150 million dollar loan, presumably insurance for the next two tranches of debt that come due in May and December of this year.

The loan portion of the deal, 280 million dollars, carries a whopping fifteen percent interest rate and is due in three and a half years.

In exchange Liberty Media gets two seats on the Sirius XM board of directors, twelve and a half million shares of preferred stock that are convertible to a forty percent of Sirius XM common shares. That means that once Liberty elects to convert the stock, they control forty percent of the voting shares. This is clearly set up for a future takeover.

As the New York Times points out today, the total value of this investment, 450 million to 530 million depending in how you calculate it, is more than the market capitalization of the company at the time of the deal, which was 372 million dollars last night, already up to 560 million as the market adjusts to the deal and nearly doubles Sirius XM's price (from ten cents per share to sixteen).

So then what was the point? Why did John Malone do this? Possibly with the ultimate goal of taking over the company. Possibly for the quote synergy factor unquote of a satellite TV and satellite radio conglomerate, cross marketing, and such. Possibly just to cockblock EchoStar from obtaining the property. But football fans think of this:

Sirius XM has the NFL's satellite radio licensing contract, a dedicated 7x24 channel and all the games, and DirecTV has the NFL's satellite TV licensing contract, NFL Sunday Ticket. I get the sense that this is going to be extraordinarily good or extraordinarily bad for us.


Here is a hilarious sidelight to the story (op. cit.), EchoStar's Charles Ergen bought that 170+ million dollar tranche of debt that came due today on the cheap, and now even though he will not get control of the company he will make a profit as the debt is repaid at face value. With rival John Malone's money.

Two billion dollars in annual revenue, twenty million subscribers and they cannot run the company. Think about that.



I am dating myself here and proud of it with the logo from the Vulture, Harry Broderick's (as played by Andy Griffith) cobbled together space ship from the too short lived and incredibly entertaining to a nine year old Salvage-1 that ran 14 episodes plus a two hour pilot on ABC in 1979, from here via here.