Liberty call saves sat radio from bankruptcy

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Can DirecTV and Sirius XM Radio create value in working together more closely?

That is a key question now that John Malone's Liberty Media — which already controls DirecTV, the largest U.S. satellite TV firm — is providing Sirius XM with as much as $530 million in funding, in return for a stake as high as 40%.

The satellite radio company avoided a bankruptcy filing ahead of a debt-repayment deadline Tuesday thanks to the Liberty deal, but neither side was willing to discuss methods of increased cooperation.

With the agreement, Malone, for now, has beaten out Charles Ergen's EchoStar, which has amassed Sirius XM debt and proposed financing the company in return for a controlling stake.

Liberty gave $250 million to Sirius XM on Tuesday so the company could pay $172 million in debt while pocketing the extra cash. Liberty has pledged an additional $280 million — not enough to satisfy the $750 million Sirius XM owes this year, though much of that debt likely will be pushed out through waivers, ensuring that the radio home of Howard Stern, Oprah Winfrey and commercial-free music is out of the woods for at least this year.

Liberty will get seats on the Sirius XM board proportional to its equity ownership, with chairman Malone and CEO Greg Maffei expected to take seats.

Investors rewarded Sirius XM for dodging Chapter 11 bankruptcy protection, which would have made its shares worthless. The stock jumped 53% to 16 cents Tuesday and has nearly tripled in value in only three trading days since bottoming out last week.

Gimme Credit analyst Shelly Lombard said in a recent report that Ergen wanted Sirius XM's satellites, repeaters and spectrum, whereas some say Malone is looking at satellite radio as a pure investment.

After all, Malone will hold the stake under investment vehicle Liberty Capital, rather than Liberty Entertainment, which houses DirecTV. In addition, Liberty's capital infusion will carry a 15% return in the form of interest, and that alone makes financial sense.

Carmel Group analyst Jimmy Schaeffler suggested that Malone moved mainly to block Ergen and invest in a company with financial potential, if run properly. Malone "will start to ask questions that haven't been asked before," Schaeffler said.

Schaeffler and others also see Sirius XM and DirecTV boosting cross-promotions on each other's services and striking shared content deals. Plus, they see a chance to position DirecTV for opportunities including mobile video products.

"I think it's more about customer lists and marketing," RBC Capital Markets analyst David Bank said.

Sirius XM syndicates its services to DirecTV and Ergen's Dish Network based on contracts signed by XM and Sirius, respectively, before their merger last year. It was not immediately clear when those deals expire.

Although his Sirius XM takeover play seems thwarted, many do not count out Ergen, a poker player. He was not available for comment Tuesday.

While some predict that Malone could take control of Sirius XM, a regulatory filing suggested that such a scenario is unlikely in the near future.

"The purchaser has agreed not to acquire more than 49.9% of our outstanding common stock for three years," the filing said. "(Some) of the standstill restrictions will cease to apply after two years."

Georg Szalai reported from New York; Paul Bond reported from Los Angeles.
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