Thursday, October 23, 2008

Sirius XM Radio Faces Sky-High Debt

Sirius XM Radio Faces Sky-High Debt

When Sirius Satellite Radio (SIRI) persuaded Howard Stern to leave traditional radio for satellite a few years ago, the shock jock took a few potshots on his way out the door. He railed against the "censorship" on terrestrial radio, and he vowed never to return. He called Sirius "the future of radio."

It looks like a rocky future. Sirius, which completed a merger with XM Satellite Radio in July, is facing a serious cash squeeze. It has more than $1 billion in debt coming due next year, and it doesn't have the money, at least not yet. Chief Executive Officer Mel Karmazin has tried to reassure investors that the company will find the necessary funding, but the questions keep coming. "Am I going to lend the company the money? I hope not," he joked last month. "I hope we don't get to that."

Investors are skeptical. Despite the merger and a combined 18.6 million subscribers, Sirius XM has seen its stock tumble from 3.94 last December to 31¢ as of Oct. 22. Beyond the funding squeeze, the company faces a tough economy in which consumers may cut back on its service, which costs $7 to $17 per month. "There's hardly a day goes by when I don't ask myself [whether Sirius will survive]," says analyst Tuna N. Amobi of Standard & Poor's (MHP), who rates the stock a buy because it's such a cheap way to profit from any upside. Analyst James Ratcliffe of Barclays Capital (BCS) estimates that Sirius needs to raise $750 million to $800 million to cover its debt repayments, programming costs, and capital spending for next year.

Sirius says it can continue to fund operations and avoid filing for bankruptcy. Executives expect to be able to raise money to meet debt payments due in February and they anticipate that existing lenders will be flexible about an additional $350 million due in May. "We are very confident of taking care of the [$270] million in February, and we are confident the banks will extend the maturity in May," says David J. Frear, chief financial officer for Sirius. The company expects its cash needs to ease next year, when Sirius forecasts it will be able to generate $300 million in earnings before interest, taxes, depreciation, and amortization.

The company has options even if it can't borrow. It can issue more stock, although this would dilute existing shares. In December, Sirius plans to ask shareholders to allow it to nearly double its total shares. "I don't think they want to issue more equity," says Barclays' Ratcliffe. "But given the conditions of the credit market, they may have to."

Howard and Oprah

The company is struggling with a problem of its own making. Sirius signed top talent—including Stern, Martha Stewart, and Oprah Winfrey—to draw in subscribers. But programming costs have triggered heavy losses. Sirius pays $60 million annually to broadcast Major League Baseball games, plus an estimated $80 million yearly to Stern and his team. Goldman Sachs (GS) predicts Sirius will lose $564 million next year as revenues climb 12%, to $2.7 billion.

Even the talent has been suffering in recent months. Stern and his agent received more than 56 million shares of Sirius in 2006 and 2007. It's unclear whether they've held on to them. If they have, the stake's value has dropped to $19 million from $220 million in December. Neither Stern nor his agent returned calls seeking comment.

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