Sirius XM's Dual Concerns: Debt, Delisting

As it tries to refinance $1 billion in debt due in '09, the satellite radio company faces shareholder opposition to a stock plan aimed at avoiding Nasdaq delisting

Sirius XM (SIRI) is racing to get its financial house in order before a meeting with restive shareholders scheduled for Dec. 18.

As chief executive officer of a company whose shares have plunged more than 85%, to 14¢, in the past three months, Mel Karmazin needs to refinance debt and demonstrate he's reining in expenses while convincing shareholders to back a reverse stock-split measure aimed at keeping the company from being delisted from the Nasdaq stock market in the coming months.

Battling Shareholders and Debt

Some investors are dead set against the move, which involves the issuance of more shares as well as a reverse split that would boost the value of the stock to a level acceptable to Nasdaq. "I just don't feel there's been enough discussion about why it's needed," says shareholder Michael Harradine, who voted against the reverse split. Another shareholder, Michael Hartleib, who's coordinating the efforts of more than 1,000 individual Sirius shareholders, plans to vote against the reverse split at the meeting.

A bigger hurdle for cash-strapped Sirius XM will be refinancing $1 billion in debt that's coming due in 2009, including $210 million in February. In recent weeks the company retained investment bank Evercore Partners (EVR) as a financial advisor to help in the effort, according to Debtwire, a financial news service. Representatives of Evercore and Sirius XM declined to comment on the report.

The company is also under pressure to reduce operating costs. Sirius XM may need to negotiate for a lower price on some of its programming agreements. The company pays $60 million a year to broadcast Major League Baseball through 2012, for instance. "They made a mistake in their programming contracts," says Paul Gallant, senior vice-president at investment advisor Stanford Group. "It's like an albatross around their neck." A reduction in revenues Sirius XM shares with auto manufacturers like General Motors (GM), which install satellite radios in cars, could help shore up finances, too.

Reconsidering the Satellite

Analysts also question plans to expand the company's constellation of costly satellites, which beam programming all over the U.S. Before the merger earlier this year that formed Sirius XM, XM Satellite Radio was due to pay $31.2 million for the construction and launch of a new satellite in 2009. Such payments may have to be deferred, analysts say.

In the long run, the company may have to make changes to its whole method for distributing content, says Max Engel, an analyst at researcher Frost & Sullivan. "There are lots of ways to distribute programming, and satellites may not prove to be the ideal way," Engel says. The company could expand its network of terrestrial repeaters, towers similar to those traditional radio stations use to relay signals, and rely on costly satellites less, Engel says.

A more aggressive push online and onto wireless networks and devices like the Apple iPhone may help expand Sirius' customer base, currently about 19 million. "Sirius may be artificially limiting its scope by relying on satellite technology as a delivery vehicle," says Susan Kevorkian, a program director for researcher IDC. A push online or through a wireless network could help Sirius round out its packages of channels, selling for $6.99 to $16.99 a month, with more personalized content.

Disgruntled Users

A greater variety of personalized options may help calm longtime XM subscribers who have grown frustrated in recent months as Sirius consolidated some of its programming and some beloved shows went away. On fan site there are more than 13 pages of comments from people considering canceling the service after losing favorite channels. On his blog, writer Joe Nick Patoski mourns the demise of XM's X Country and Disorder channels—"two changes…[that] have me pondering cancellation."

Word of disgruntled existing users may keep new subscribers from signing up. "That kind of move has a ripple effect beyond the existing subscriber base," says Kevorkian. "It lends bad publicity for the service."

By starting to distribute its content differently, for instance via the iPhone, Sirius may be able to offer what some of its rivals already offer, and allow users to pay to listen to specific interviews or a particular concert. It may even allow subscribers to purchase song tracks and audio books from its Web site or through its radio receivers. "If they are going to remain tied to a pure subscription model, they are probably not going to succeed in the long run," Engel says. After all, rivals like Web radio, HD radio, and music services like Apple's (AAPL) iTunes are making inroads. Automakers like Ford (F) are building more support for Apple iPod music players into their cars. According to IDC's fall survey of nearly 2,000 people, 58% of Americans own portable media players, while only 16.5% subscribe to satellite radio service.

Many of those customers are die-hards. To keep their favorite satellite radio service operating, many of the members of Hartleib's group "will donate $10,000, $1,000 to Sirius," Hartleib says. "We can raise the money." But the company will need more than the donations of a handful of devoted investors to appease creditors.

Business Exchange related topics:Sirius XMSatellite NetworksConsumer Marketing