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The Only Options for Sirius

Charles Ergen and Sirius XM Radio (Nasdaq: SIRI  ) are in a brutal game of chicken.

The New York Times is reporting that the satellite radio provider is drafting Chapter 11 bankruptcy paperwork with a restructuring attorney and could file for reorganization in a matter of days.

Is CEO Mel Karmazin that desperate, or is this a test to see if EchoStar's (Nasdaq: SATS  ) Ergen blinks? Ergen now has a controlling interest in the $174.6 million in debt that Sirius needs to pay back next week. There are several scenarios here, and they are all deep-fried in drama.

  • Sirius could go ahead and file for bankruptcy protection, forcing Ergen to take a likely hit on the debt and then have to outbid creditors, along with any other potential suitors, for control of the company.
  • Sirius could find some last-minute assistance to pay off EchoStar, skirting bankruptcy protection until at least May, when $350 million is due to creditors that include JPMorgan Chase (NYSE: JPM  ) and UBS (NYSE: UBS  ) . Of course, it would still have a $400 million payment due in December.
  • EchoStar and Sirius could negotiate for an adequate chunk of equity to satisfy the debt obligation.
  • Ergen could simply make a formal offer to buy all of Sirius.

Plan A: Chapter 11
This kind of reorganization makes sense on paper. Sirius would emerge with a cleaner balance sheet, and quite likely, new leadership. Under bankruptcy court protection, Sirius would be able to negotiate new programming contracts and get out of unattractive deals entirely.

A leaner Sirius could be a thing of beauty. The company closed the third quarter with 18.9 million subscribers. It has been a financial disaster up to this point. The combined company has amassed $9.5 billion in accumulated deficit. However, it was already looking to turn the corner after completing last year's merger. Back in November, Sirius was projecting to break even, based on adjusted free cash flow, in 2009. A svelte Sirius could really make things interesting.

The rub here, of course, is that bankruptcy reorganization kills momentum for consumer companies. How many Sirius and XM subscribers would run out to cancel their services if they confuse Chapter 11 reorganization with Chapter 7 liquidation? Because shareholders are likely to walk out of this with useless stock certificates, where would that venom go? Many are probably Sirius subscribers. The end result is that Sirius -- a company that has grown its subscriber count every quarter since its inception -- may see a drop, if not a dramatic drop, in its accounts if it files for bankruptcy protection.

Plan B: Here's the money
Sirius isn't entirely penniless, despite packing more than $3 billion in debt on its balance sheet. In a shrewd move last month, the company telegraphed a March rate hike for non-primary accounts. The move, along with the decision to begin charging for its Web-streaming option, was supposed to motivate existing subscribers to fork over money for multiyear and even lifetime subscription plans.

That isn't going to give Sirius enough money to overcome its debt challenges, but it should be weighing down the collection tray.

Creditors have been leery of handing Sirius new money or they would have done so by now. However, the threat of bankruptcy protection might be enough to spook JPMorgan or UBS -- with each one on the hook for $100 million already -- into coming through with additional financing. If not, the company could always cut a rushed deal with terrestrial radio heavies like Clear Channel or CBS (NYSE: CBS  ) in exchange for a stake or content syndication rights. It's unlikely, because terrestrial radio would benefit from satellite radio's stumble, but it's worth a shot.

Plan C: Let's swap
EchoStar clearly wants some skin in the satellite radio game. How big a stake in Sirius could it get for EchoStar's share of the $174.6 million debt coming due a few days from now?

Sirius is at the point of the Monopoly board game where it lands on Marvin Gardens with a hotel. It doesn't have enough money, so it begins to flip properties over and haggle for the sake of not ending the game. The rub for Sirius is that its next roll will be a $350 million hotel in Park Place come May, and a $400 million Boardwalk hotel come December.

Sirius isn't going to get a lot of mileage out of its stock as long as it's trading in the pennies, but it can always cave in to massive dilution this month and hope that prospects improve after that.

Plan D: Let's make a deal
Ergen knows satellites. He watches over both EchoStar and DISH Network (Nasdaq: DISH  ) . It remains to be seen how much he can offer for Sirius, but he's already in up to his ankles with next week's debt.

Regulators may have something to say about this, though. They did, after all, block DISH's merger with DirecTV (NYSE: DTV  ) several years ago. Will it matter that Sirius is on the ropes, in large part because of regulator delays? It may. Ergen may get a free pass in the regulatory version of a do-over.

Ultimately, there are four ways to go at this intersection. None of the paths is boring.

Some other Sirius stories:

JPMorgan Chase is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz is such a fan of satellite radio that he subscribes to both Sirius and XM. He does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 11, 2009, at 2:22 PM, aosborn1 wrote:

    I believe there are 10's of thousands if not 100's of thousand sirius share holders who are also subscribers that will cancel the service in a heartbeat if they end up with worthless shares. I'll be first in line to cancel. How about the share holders who are also Dish network subscribers like myself. I'll be on the phone with Dish Network to cancel and switch to Direct TV. I think the trickle down will be huge. It makes my stomach turn to think my 237,000 shares will go down the drain and I wouldn't give either company another dime as a subscriber.

  • Report this Comment On February 11, 2009, at 2:32 PM, DemianBohemian wrote:

    Where are you getting your information to verify that Ergen owns all of the Feb. debt? There is no way that this can be verified and you are speaking as if it is fact. You have made false statements in the past about the SIRI debt also which you have corrected at my request. You need to make it clear that you don't know how much of the Feb. debt that Ergen owns.....

  • Report this Comment On February 11, 2009, at 7:19 PM, TMFBreakerRick wrote:

    DB, Monday's WSJ had the following quote:

    "It was only last week, however, that EchoStar acquired control of a piece of Sirius's debt that could determine the company's fate. The debt in question is a $175 million tranche that matures Feb. 17."

    It's not as explicit as I had thought (when I believed "the debt in question" is referring the what EchoStar controls) so I did just put in a request to have that corrected in the article.

    I appreciate the heads up. On the downside, I'm human. On the upside, the online medium can be corrected.

  • Report this Comment On February 11, 2009, at 7:35 PM, chilln868 wrote:

    I see Plan A happening.

    I think those who have invested 10's of millions will do everything in their power to keep bankruptcy from happening.

  • Report this Comment On February 12, 2009, at 9:49 AM, ByrneShill wrote:

    Les carottes sont cuites!

    Plan A is the way to go. Honestly here, the shareholders (which have endured a lot already) will be taking a bath, no matter how things turn.February's debt of 300 milions is already almost all of SIRI's market cap. Even diluting 2:1 (supposing someone out there is willing to buy those shares) will dilute the shareholders a lot. But the company itself still wouldn't be out of the wood.

    For the sake of satellite radio, file chapter 11 already. Maybe a few shareholders will cancel, but overall, the health of the industry itself is what's at stake here. Chapter 11 would let SIRI come back as a stronger company. Heck, if the financials make sense, maybe I would invest in the new company.

  • Report this Comment On February 16, 2009, at 10:00 AM, draland wrote:

    This article is old and stale already !!

    Chapter 11 is NOT AN Option for any investor !!

    And why not discuss Option E for that matter ....................John Malone’s Liberty Media is offering Sirius XM a bridge loan of several hundred million dollars to help pay off debt that matures Tuesday.”...............

    The investor's do not and should not be wiped out !

  • Report this Comment On February 16, 2009, at 10:20 AM, dnparent wrote:

    Draland, you hit it on the head. Old, stale, and inaccurate. FOOL if you cannnot print timely information don't print anything.

  • Report this Comment On February 16, 2009, at 10:30 PM, draland wrote:

    Thanks, dnparent...............

  • Report this Comment On February 17, 2009, at 6:07 PM, jord3t wrote:

    Rick Aristotle Munarriz....

    nice article.... too bad you got it WRONG!!!

    I'm sick of reading all these articles by journalists who seem to have the goal of bashing the stock...

    you are not doing us shareholders any favors, so unless you have the inside scoop....

    SHUT UP!

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