Liberty Throws Sirius a $530 Million Lifeline

Embattled Sirius XM Radio (SIRI), facing an imminent deadline to pay $172 million in debt, was rescued through a deal with Liberty Media (LMDIA) that will give Liberty and its billionaire Chairman John Malone, owner of DirecTV (DTV), shares of preferred stock and two seats on the Sirius XM board in exchange for $430 million in loans, to be doled out in two phases. Sirius reportedly had been preparing for a possible Chapter 11 bankruptcy filing, but the company's shares, which had been trading for as little as 10¢, gained sharply on the Feb. 17 announcement.

The deal represents a reprieve for Sirius CEO Mel Karmazin, who had been under pressure from satellite TV mogul Charles Ergen, who had bought much of the outstanding Sirius debt and appeared poised to take control of Sirius. Ergen, who heads Dish Network (DISH) and EchoStar Communications (SATS), appears to have a consolation prize, having bought up the debt on the cheap.

Three oversize personalities shape the deal's dynamic. Karmazin has been sore with Ergen since 2004, when Ergen pulled Viacom's MTV and Nickelodeon channels from Dish Network during a contract dispute. Karmazin was Viacom's (VIA) chairman at the time. Malone, meanwhile, probably wouldn't want to see Sirius fall into the hands of competitor Ergen.

"An Important Validation"

Under the first phase of the deal, Sirius XM will get a $280 million senior secured loan from Liberty, $250 million of which is to be paid today. Sirius will use the proceeds to pay the $172 million in debt that is due today and will use the balance for working capital and transaction costs. The loan carries a 15% interest rate and matures in December 2012.

Under the second phase of the deal, Liberty will loan an additional $150 million to Sirius XM's subsidiary, XM Radio. When that is completed, Liberty will get 12.5 million shares of preferred stock convertible into 40% of the common stock of Sirius XM. Also included in the deal are two seats on the Sirius board, expected to be taken by Malone and Liberty CEO and President Greg Maffei, according to a joint announcement from the companies.

Liberty will also buy up to $100 million of Sirius' currently outstanding debt.

"Liberty's investment is an important validation of what Sirius XM has already achieved and a vote of confidence in what we will achieve," Karmazin said in a statement.

Maffei, for his turn, suggested that Liberty sees potential for satellite radio, even in the economic downturn. Satellite radio installed in new cars is an important source of subscribers for Sirius XM.

"Sirius XM's ability to grow subscribers and revenue in a difficult financial and auto market is indicative of how listeners view this as a 'must-have' service," Maffei said in a statement.

Despite the imminent reprieve given to Sirius by the Feb. 17 deal, Sirius still faces an uphill battle, with another $250 million in notes due in May and $228 million in December. "We see continued tenuous credit," Standard & Poor's analyst Tuna Amobi said in a research note, reiterating a hold opinion on the shares.

In late-morning trading, Sirius shares gained 70%, to 18¢, while Liberty shares slid 4%, to 18.25.

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