Where were all of these potential suitors when Sirius XM Radio (NASDAQ:SIRI) needed a friend?

The Wall Street Journal reports that the satellite radio operator is in talks with Liberty Media (NASDAQ:LINTA), in a last-minute effort to avoid filing for bankruptcy next week. This comes just as EchoStar (NASDAQ:SATS) has been snapping up chunks of the cash-strapped company's debt.

The heightened interest in Sirius may not necessarily save investors. Instead of helping Sirius over next week's debt repayment hump of $174.6 million -- only to bump up against an even bigger bill due in three months -- Liberty may just wait to bid on Sirius XM's assets in bankruptcy proceedings.

That would be a mistake.

Give me Liberty (instead of death)
There are several reasons why any potential suitor would be better off buying Sirius XM now, instead of holding out for a Chapter 11 fire sale:

  • Striking a friendly buyout deal now, or at least acquiring a significant stake in Sirius XM, gives any potential buyer a welcome dose of certainty. With two rivals fighting over the scraps of the company in bankruptcy court, a bidding war could erupt, driving up the expense of any piecemeal purchases.
  • As I've said before, bankruptcy's bad news for any consumer-facing company. Witness holiday shoppers' avoidance of Circuit City when it was in reorganization (before it was left with little choice but to liquidate). Similarly, Sirius XM subscribers might head for the exits if they lose confidence in the service's continued existence. At the very least, revenue from juicy lifetime subscriptions and multi-year purchases will dry up.

A race against time
All of the attention coming Sirius XM's way is welcome, but it comes perilously close to the company's debt deadline. Should investors rush in, hoping to beat the clock, or keep a safe distance from this potential time bomb?

At this point -- and clearly at this price -- Sirius XM is speculative. Investors need to be prepared to lose everything, whether they bought in yesterday at $0.06 a share, or paid 100 times more in 2004, during stand-alone Sirius's post-Howard Stern rally. Whatever the entry point, it's always a 100% trip down to Nil City. More than $3 billion in creditor claims need to be satisfied before shareholders are invited to the table, and only a brutal feeding frenzy in bankruptcy among rival bidders would leave anything beyond that amount left for common shareholders.

But if the company survives, the upside to an investment now could be equally huge. If EchoStar swaps its debt for a stake in the company, or if Liberty forks over some needed greenbacks, Sirius XM will live to fight another day. If it's able to clear the costly milestones and programming payments due this year, Sirius XM doesn't have another tab coming due until 2011. In other words, if Sirius XM is still alive in its present form by year's end, the stock should be trading well above today's price.

All in all, Sirius XM is more of a gamble than an investment.

Smoking out more suitors
Sirius XM had amassed 18.9 million subscribers as of last year's third quarter, just shy of the 21 million active Research In Motion (NASDAQ:RIMM) BlackBerry subscribers at the time. Satellite radio's roll call is nearly double the 10 million subscribers at Netflix (NASDAQ:NFLX) today, and several times the audience size that TiVo (NASDAQ:TIVO) commands. Satellite television leader DirecTV (NYSE:DTV) closed out 2008 with just 17.6 million subscribers.

Presiding over nearly 19 million people who are willing to pay for premium radio sounds valuable to me. How valuable? I guess the next few days will let us know.

More news than static on Sirius XM:

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Longtime Fool contributor Rick Munarriz subscribes to both XM and Sirius. He does not own shares in any of the companies in this story, save for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy is all ears.