Sirius XM’s Karmazin Exits as Malone’s Liberty Takes Over
Sirius XM Radio Inc. (SIRI) Chief Executive Officer Mel Karmazin said he will leave on Feb. 1 after clashing with John Malone, the billionaire who plans to take control of the satellite-radio operator.
Karmazin, 69, will also leave the board, according to a statement yesterday. Malone’s Liberty Media Corp., which owns almost 50 percent of New York-based Sirius, is awaiting U.S. Federal Communications Commission approval to take control.
The two sides have dueled verbally over Karmazin’s future, with Liberty Media CEO Greg Maffei saying last month the former CBS and Viacom executive was replaceable. Karmazin, who clashed with Viacom Chairman Sumner Redstone earlier in his career, has said he was probably too expensive for Liberty.
“You have two really big media moguls,” David Bank, an analyst with RBC Capital Markets, said in a Bloomberg Television interview. “Mel didn’t have a fantastic experience working for Sumner Redstone. Our sense was probably that he didn’t want to work for another big media mogul. He wanted to be the decision- maker himself, and the future of the company is going to be driven by Malone.”
A company spokesman said Karmazin declined to participate in an interview. He announced his impending resignation to Sirius employees in an e-mail last night, touting the company’s accomplishments in his eight years as CEO.
Sirius rose 0.7 percent to $2.89 at the close in New York. The shares have increased 59 percent this year.
Malone, 71, helped Sirius avoid bankruptcy in 2009, lending the company $530 million. That deal earned Liberty billions, gave it a 40 percent stake in Sirius and put Malone on a path to control.
Malone said in July he plans to spin off Sirius after gaining control. Liberty, based in Englewood, Colorado, plans to eventually execute a Reverse Morris Trust and distribute the shares to its investors while avoiding paying taxes on the separation.
Differences with Karmazin emerged in March, when Liberty sought FCC approval to exercise control of Sirius without majority ownership of the stock. The executive opposed that move, and it was denied. Liberty reapplied in August, saying it intended to raise its stake to more than 50 percent. It has been adding shares since and is awaiting the end of the public- comment period.
Bank, of RBC Capital Markets, said he expects Sirius under Liberty to take on more debt, increasing the leverage as Malone did with El Segundo, California-based DirecTV, the satellite television provider. Malone must evaluate the spinoff against other options such as taking direct control and buying back stock, he said.
“Those were decisions that Mel wanted to make, rather than decisions that Mel wanted to be told to make,” Bank said.
Karmazin, who joined CBS Radio in 1967 and rose to become one of the top U.S. media executives, moved to New York-based Sirius in 2004 after quitting as president of Viacom Inc. (VIAB) He had clashed with Redstone, the company’s controlling shareholder.
Talk-show host Howard Stern, whom Karmazin had helped get hired in 1985 after he was fired at WNBC-AM radio, called Karmazin’s departure from Viacom a “coup d’etat.” Stern announced he would join joined Sirius a month before Karmazin did, after 30 years in free broadcasting. He signed a $500 million contract, which began in 2006.
In 2008, Karmazin presided over Sirius’s merger with XM Satellite Radio, combining the two pay-radio providers just before a slump in U.S. auto sales cut demand for pre-installed radios in cars.
Months after the merger was complete, Sirius was on the brink of bankruptcy. Karmazin had spurned a takeover offer from Charles Ergen’s EchoStar Corp., which bought Sirius’s convertible debt, threatening to take control and seek his removal. Malone stepped in with the loan in February 2009 on the day the notes were due, snatching Sirius away from Ergen and allowing Karmazin to retain his job.
Liberty received preferred shares convertible into 40 percent of Sirius XM common stock, which was trading at 16 cents on the day the Liberty transaction was announced.
The deal was tremendously profitable for Malone, who also bought Sirius’s debt while the company was on the ropes. Liberty’s investment returned $1.7 billion in nine months, Maffei told Bloomberg News in November 2009. Investments in Sirius debt alone garnered $175 million in profit by December 2009. Sirius shares have soared to $2.87 at yesterday’s close.
The investment “has been a hell of a run,” Maffei said at Liberty Media’s investor day this month. He praised Karmazin’s work leading Sirius, which projected adjusted earnings before interest, taxes, depreciation and amortization to be around $900 million this year.
“Mel is a superlative CEO and very few people in the world could have ever turned around the company the way he has,” David Pearlman, who worked with Karmazin for 4 1/2 years as former co-chief operating officer at CBS Radio, said in an interview. “The question for the future is, what is the real subscriber potential, long-term, for any form of pay radio.”
Karmazin earned more than $10.7 million last year in salary and bonus. Last week, he exercised 13.1 million in stock options, garnering a profit of about $31 million.
Sirius’s board has formed a search committee, led by Maffei, that includes James Mooney, chairman of Virgin Media Inc., and Sirius Chairman Eddy Hartenstein, who is CEO of bankrupt newspaper publisher Tribune Co. The panel will consider both internal and external candidates.
“We have the team, the talent and the financial standing to continue to grow and lead the industry by anyone’s measure,” Karmazin wrote in his letter to employees. “Our bench is deep, our drive is strong and our ability to deliver has been proven again and again.”
Sirius has 23.4 million subscribers and became a profitable company in 2010 after more than a decade of losses. It has satellite radios installed in about two-thirds of all new automobiles.
Karmazin began his career in radio ad sales. While chief executive of Infinity Broadcasting Corp. in 1996, he persuaded Westinghouse Electric Corp., later renamed CBS, to take over Infinity. He became president of Viacom after that company acquired CBS for $43.4 billion in 2000.
Earlier this year at Sirius’s annual shareholder meeting, Karmazin said he didn’t want to be responsible for reporting to anyone when making decisions.
“A new CEO may have a different skill set that can benefit the company going forward,” Jessica Reif Cohen, an analyst with Bank of America, said in a note to clients. The news “does not come as a complete shock.”
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