Aug. 15 (Bloomberg) -- Sirius XM Radio Inc. struck an ``ugly'' debt deal to close the merger of the only two U.S. satellite radio operators, Chief Executive Officer Mel Karmazin said.

A bond sale the evening of Monday, July 28, allowed Karmazin to complete the $2.76 billion all-stock purchase of Washington- based XM Satellite Radio Holdings Inc. by New York-based Sirius, which he has led since 2004. Together, XM and Sirius have a total of more than 18.5 million subscribers and constitute the second- biggest U.S. radio operator by sales, after broadcaster Clear Channel Communications Inc.

Concerned that traditional radio operators might get a judge to block the merger, which he had pursued for more than a year, Karmazin sought to conclude the transaction within hours of getting regulatory approval. To do so, he needed to accept unfavorable terms on refinancing.

``I hated it,'' the 64-year-old CEO said in an interview yesterday in New York. ``It was unfortunate, but we did it.''

The sale of $550 million in bonds convertible into shares of the new company occurred on a day when yields on debt rated below investment grade rose the most in more than a month. Moody's Investors Service Inc. rates Sirius's long-term debt Caa1, seven levels below investment grade.

Also, Sirius XM declined 16 percent on the Nasdaq Stock Market that day, and continued to drop in extended trading during Karmazin's three-hour negotiation with potential buyers of the bonds. The shares, which gained 6 cents to $1.49 at 4 p.m. New York time on the Nasdaq, have lost more than 20 percent since that night.

Awaiting Approval

XM needed to refinance $1.25 billion in debt to satisfy provisions demanding repayment upon a change in control of the company when it became a unit of Sirius XM. Karmazin didn't seek refinancing until he was sure U.S. regulators would approve the takeover.

``If the merger didn't happen, we didn't want to do anything in the market,'' Karmazin said.

The merger did happen. The Federal Communications Commission voted 3-2 to approve the deal late on July 25, a Friday. The agency posted a press release announcing the vote on its Web site the following Monday, which Sirius XM's lawyers interpreted as the final go-ahead.

XM had already raised $700 million in the junk-bond market on July 24 as regulatory approval neared. Unless Karmazin could raise $550 million more on Monday evening and seal the merger, competitors might have time to get a judge to stay the transaction, he said.

`My Choice'

``My choice at 7:15 Monday night was take the deal that was on the table, or wait,'' Karmazin said.

The extra yield investors demand to own junk bonds rather than similar-maturity Treasuries widened 19 basis points to 779 basis points on July 28, the biggest jump since June 26, according to Merrill Lynch & Co.'s U.S. High Yield Master II index. A basis point is equivalent to 0.01 percentage point.

``The market on Monday was very ugly,'' Karmazin said. ``The book was not looking good.'' He took the deal.

On July 29, XM said it set interest of 7 percent for its offering of senior subordinated securities due in December 2014, convertible into common stock of Sirius XM at an initial price equivalent to $1.875 a share.

The sale was a private placement that let the company raise money without the more extensive disclosures required when selling stocks or bonds to the public.

`Good Job'

``There could have been a scenario where the deal didn't happen,'' Karmazin said. Morgan Stanley, which managed the sale, ``did a very good job in having it happen.'' Bank spokesman Mark Lake declined to comment.

Still, it could have been worse: Yield spreads widened another 35 basis points over the following week.

Karmazin has said he expects to save about $400 million next year eliminating overlap between operations at Sirius and XM. That savings will alleviate some of the dilution of the shares from the debt agreements, he said.

Sirius XM faces more than $1 billion in debt repayments in 2009. Some of that will ``be dealt with sooner rather than later, just to get that issue behind us,'' Karmazin said.

To contact the reporter on this story: Todd Shields in Washington at tshields3@bloomberg.net

Last Updated: August 15, 2008 16:06 EDT