02.17.09

Sirius XM: Liberty outflanks Echostar for now

Posted in Financials, TerreStar at 9:38 am by timfarrar

So Liberty Media has struck a deal to invest up to $530M in Sirius XM, in the form of secured loans, and will receive preferred stock convertible into a 40% stake in the company in exchange for its investment. The first $280M tranche from Liberty will be used to pay off $171.6M in bonds held by Echostar, which are due for redemption today. Subsequently, and subject to “various closing conditions”, Liberty will loan Sirius XM a further $150M and offer to acquire up to $100M of the company’s outstanding loans.

While this means that Echostar’s attempt to acquire Sirius XM has been defeated for the moment, it may be too early to write Echostar off completely. As we highlighted previously, Sirius XM would offer potential synergies with Echostar’s other investments (particularly in TerreStar), which will not be available to Liberty. Indeed other analysts have commented on how satellite radio holds little interest for DirecTV, and in our view, speculation that Sirius XM is a good route into mobile video is completely misplaced. We highlighted back in September 2006 that even if the mobile video opportunity is large (which is now far from certain), satellite radio is a very poor solution for providing the necessary handheld coverage, without deploying a huge number of repeaters. Unless either the Sirius or XM radio service was closed down, it is also unclear that there would be sufficient capacity for a meaningful video service, since both Sirius and XM each have only about 4-5Mbps of data delivery capability within their current architectures.

Instead, we consider that the potential to add two-way (OnStar-like) capability to the in-car service, using Echostar’s other assets (i.e. TerreStar), offers much more long term promise. Viewed from this perspective, Liberty’s investment should be seen more as an attempt to frustrate Charlie Ergen’s ambitions, and acquire the satellite radio service at a very attractive price, rather than a desire to add new mobile services to DirecTV’s offering. Conversely, we shouldn’t rule out the possibility of Echostar coming back with a better offer (or simply acquiring more debt than Liberty would want to buy back), given the much greater synergies available to it from an acquisition of Sirius XM, and the likelihood that Sirius XM will continue to struggle to generate enough cash to meet its debt repayments over the next year or more, while new car sales remain at a low ebb.

4 Comments »

  1. mss_guy said,

    February 20, 2009 at 10:50 am

    I think it’s the millions of Sirius/XM subs that are the key to Liberty’s interest in the company. It’s not too far fetched to see them marketing DirecTV to this pool of subs and even coming up with “double-play” bundles of satellite TV at home and satellite radio on the road with bundle discounts.

    And perhaps the broadband carrier deals with DirecTV could be extended to include Sirius-XM so that AT&T could offer wireline and wireless calling on it’s network, TV through DirecTV and sat-radio through Sirius-XM – all on one bill.

  2. mss_guy said,

    March 12, 2009 at 12:57 pm

    Well the bundling speculation seems confirmed by this posting at engadget

    http://www.engadgethd.com/2009/02/27/sirius-directv-bundles-already-being-considered/

    Sirius / DirecTV bundles already being considered
    by Darren Murph, posted Feb 27th 2009 at 12:22PM

    We posed the question barely a week ago, and already we’ve got our answer. Or, not really, but pretty much. You see, Liberty Media (DirecTV’s parent company) CEO Gregg Maffei told analysts on a recent conference call that “one could talk about or imagine bundles, probably the $80 [per month] DirecTV product offering free trials of the $11 [monthly] Sirius XM product more likely than the other way around.” He continued by stating that he hoped Sirius and DirecTV could “proceed on some of those in ways that are obviously beneficial for both parties.” Really, we feel that it’s just a matter of time. DirecTV has been grappling for ways to outgun DISH for years, and it’d be tough to fathom the satcaster having Sirius as a cousin and not exploiting it. Whether or not bundled sat ratio will be enough to make prospective customers choose it over other pay-TV alternatives remains to be seen, but really, what does DirecTV (or Sirius, for that matter) have to lose?

  3. timfarrar said,

    March 19, 2009 at 10:31 am

    There have certainly been indications that there may be bundled offers of satellite radio with DirecTV subscriptions. However, is that really going to give DirecTV any competitive advantage over DISH? It seems very unlikely to make any difference to DirecTV’s proposition (who buys satellite TV based on audio content?) even if it helps Sirius XM somewhat. So long as satellite radio proves to be a sustainable business (which we believe is the case), Liberty will get a great financial return on its investment (and its already got a $30M “structuring fee”), even if Sirius XM ultimately doesn’t create value for its current equity holders.

  4. timfarrar said,

    April 30, 2009 at 10:52 am

    The recent interview with John Malone in the Denver Business Journal gave some more support to my view that bundling with DirecTV was not a driver for this deal: “This is not a DirecTV play. This is a Liberty play on Sirius. It may evolve into some involvement by DirecTV. It could mean some involvement by Charlie. Right at the moment, we just saw something we were interested in and decided we should get involved…Obviously we have a large stake in DirecTV, and how Sirius could play into that is an important consideration, but it’s not on the table today.”

    The mention of possible collaboration with Charlie Ergen is particularly interesting “if Charlie has a great idea on how to exploit the asset, we may end up doing something with Charlie” – perhaps a two-way add-on for satellite radio may eventually emerge after all.

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