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Sirius XM Faces Tough Choices

2/12/2009 02:05:00 PM Eastern

New York — Bankruptcy or a takeover by one of the satellite TV companies appear to be the key options remaining for Sirius XM, according to analysts.

Decision day is Feb. 17, when a $175 million slice of debt that Sirius reportedly owes Dish Network CEO Charlie Ergen comes due, at a time when credit is frozen and Sirius’ subscriber growth has narrowed due to slower car sales.

 A New York Times report said Liberty Media, which owns a controlling interest in DirecTV, is now in talks with Sirius, and the Wall Street Journal was first to report that Ergen is also talking to Sirius, possibly to win control of the company that owes Ergen a total of $400 million.

It boils down to two main choices for Sirius, lead by CEO Mel Karmazin, said David Bank, analyst for RBC Capital Markets.

Bankruptcy would allow Sirius to restructure its deals with Howard Stern (who is three years into a five-year contract at $500 million) as well as the NFL, MLB and others and to operate as a slimmer, more profitable company. But then again, bankruptcy might cause some of Sirius’ 20 million subscribers to take flight.

“Someone has to decide if the business disruption risk [from bankruptcy] is worth getting a more economical solution in the long run versus taking a bird in the hand,” said Bank referring to a bird-in-the-hand deal with Ergen or Liberty Media, which is run by chairman John Malone.

“I don’t know the answer and don’t know that anyone does,” he said, but, “if there’s a good deal they have to take it,” he said of the Sirius board of directors.

Media reports said a deal with Liberty would be more favorable to Karmazin, who reportedly does not get along with Ergen. Bank believes the talks with Liberty are new and therefore any deal by Feb. 17 would be rushed, so Ergen would be the more likely candidate.

Both the satellite TV companies may be interested in XM’s satellites or ground repeaters, which are said to be multipurpose and more adaptable to other uses than those of Sirius.

 Jimmy Schaeffler, chairman of The Carmel Group, believes there are enough synergies between Sirius and satellite TV that either DirecTV or Dish Network could benefit by owning the satellite radio spectrum and winning a pipeline into the car.

 “It’s a fit. They are both subscription businesses, they both have a similar infrastructure, they both deal in consumer electronics products,” he said, noting that Sirius is also attractive right now because “it’s a buy” and “John Malone and Charlie Ergen both have cash.”

It is also possible that Malone is simply trying to drive up the price of Sirius for Ergen, and that other companies may yet join in the bidding, said Schaeffler. “I expect others may join. The cable guys will not and I don’t thing the telcos will but the Googles and Yahoos might see this as an opportunity ... It’s a big old chess game,” he said.

It is expected that such a satellite TV takeover of Sirius would require federal approval.

 Industry members had mixed reactions to a possible Sirius XM bankruptcy.

Some car radio makers are using subsidized satellite-radio chipsets in their radios and others are not receiving subsidies.

Retailers have already seen their satellite radio business drop over the past two years as consumers who were scared away by the merger, have not returned in droves since the Sirius XM merger’s completion.

Audio Express, a 40-store chain, said its sales are about a quarter of what they were when the merger was first announced.

Sirius XM retail sales (and not OEM sales) were in negative territory in net new subscribers during the third quarter on a Pro Forma basis.