Liberty and Sirius for All

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Sirius XM Radio (Nasdaq: SIRI  ) will live to file another day.

The satellite radio operator was able to apparently thwart the amorous advances of EchoStar's (Nasdaq: SATS  ) Charles Ergen, finding an opportunistic white knight in Liberty Media (Nasdaq: LINTA  ) . Liberty will provide as much as $530 million in loans to Sirius, in exchange for a sizeable stake in the cash-strapped media company.

Sirius XM was certainly close to a curtain call, since it had to repay nearly $175 million of convertible notes later today.

Keep in mind that the terms of the loan are brutal.

  • The first $250 million of the loans will be funded today, at a steep interest rate of 15%. That is a far cry from the 2.5% convertibles being redeemed today.
  • Upon completing all of the loans, Liberty Media will be given preferred stock that is the equivalent of a 40% stake in the company.

A 15% return on borrowed money and a huge stake in one of the few media companies still growing these days? Where do I sign up?

However, it was "give me Liberty or give me death" for Sirius XM shareholders, as a bankruptcy filing would have likely wiped them out. And 40% in shareholder dilution is huge in terms of market cap, but it's not much of a factor when the market rightfully values Sirius XM based on its debt-padded enterprise value.

If you don't mind me saying so, you nailed it. In our Fool Poll last week, we asked you what would become of Sirius XM:

  • It will file for Chapter 11 bankruptcy: 846 votes-25%
  • Sirius will find a way to pay off its debt on its own: 392 votes-12%
  • A third party will provide a capital infusion in exchange for a stake: 1,297 votes-38%
  • A third party will buy Sirius XM whole-770 votes-23%
  • None of the above: 68 votes-2%

Just a quarter of the poll participants figured that bankruptcy reorganization would be Sirius XM's destiny, a far more optimistic view than a market that had beaten down the shares in recent months. The most popular choice -- a third party providing a cash infusion in exchange for a stake -- was exactly what happened.

So where do we go from here? The interest-bearing investment ultimately buys Sirius time, but Liberty's stake can't do it alone. Sirius XM is still going to have to come up with a little more money to repay debt in May and December. More than half of the $350 million of debt repayments due in three months comes in the form of $100 million apiece owed to JPMorgan Chase (NYSE: JPM  ) and UBS AG (NYSE: UBS  ) . If Sirius XM can successfully refinance there, it won't need much more than Liberty's bailout in the near-term.

Investors are certainly encouraged, with Sirius XM shares having more than doubled at one point this morning. Yes, the Liberty investment terms are stifling, but having little breathing room is better than having no breath at all.

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 (5) | Recommend This Article (12)

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 17, 2009, at 12:15 PM, ByrneShill wrote:

    When is the next round of financing again? June? I wouldn't be surprised if Liberty takes control of SIRI at that point, leaving past shareholders with an almost empty bag. Sure, those who bought at 11¢ this last month (or even 5¢ last week) feel briliant, but remember that a lot of shares (especially RB subscribers) bought more along the lines of 10-25$.

    In the meantime, I guess that owning 60% of a "viable" company is better than owning 100% of a bankrupt one.

  • Report this Comment On February 17, 2009, at 12:40 PM, johndlg1 wrote:

    The article states "And 40% in shareholder dilution is huge in terms of market cap...". Is this an accurate statement being that "Liberty Media will be given preferred stock that is the equivalent to a 40% stake in the company." Wont this really result in a far higher dilution?

    To simplify...if there were 100 shares and someone were promised a "40% stake in the company" then closer to 51 additional shares would be issued resulting in a 51% dilution to the original shareholders.

    Let me know if you agree.

  • Report this Comment On February 17, 2009, at 2:23 PM, ThongLover wrote:

    Great news...did anyone hear Donny Deutsch on MSNBC? He has no clue...he asked his coworkers if they had Sirius? He basically said that the technology hadn't caught on yet and it won't work because consumers like the "connection" to FM. Who is he getting paid by? What a completely incorrect statement! That's why there are 20 million subscribers. We don't want the "connection" that consists of DJ's babbling on and on and then taking a break for 5-10 minutes of overplayed commercials. If he would listen to Sirius, he would find out there is connection...whether you're looking for sports, news, entertainment...or wow...even MUSIC! And I mean music...not 5 songs per hour between the BLAH BLAH BLAH!

    Anyway, I needed to vent about yet another uniformed talking head on television...GO SIRIUS!

    One more thing...i listen to CNN, HDLN & CNBC on Sirius...maybe that's can't listen to MSNBC on Sirius I don't believe...yawn...

  • Report this Comment On February 17, 2009, at 5:19 PM, TMFBreakerRick wrote:

    Byrne, Sirius was never a RB rec. XM was a pick in 2005 and we told subscribers to sell at $15 in 2006. It was NOT a good pick (went from $30 to $15 until given the boot), but a great sell recommendation. And if you assume someone held XM through the merger, remember that they received 4.6 shares of Sirius, so they never paid the Sirius equivalent of double-digit prices.

    John, as for the dilution, let's use simpler numbers. Say a company has 60 million shares and hands over 40 million new shares to an investor. The previous shareholders are left owning 3/5ths of the stake they used to, hence the 40% dilution.

  • Report this Comment On February 25, 2009, at 5:49 PM, Vancouvercapital wrote:

    Not a bad lottery ticket here.

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