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: