Liberty to lend Sirius $530 million, get 40 percent stake

By Franklin Paul and Yinka Adegoke

NEW YORK (Reuters) - Mel Karmazin's Sirius XM Radio Inc won a reprieve from its debt deadlines on Tuesday after Liberty Media Corp agreed to lend $530 million to help the satellite radio provider fend off bankruptcy.

In return, Liberty, controlled by cable mogul John Malone, stands to take a controlling 40 percent equity stake in Sirius XM, the second largest U.S. subscription service after cable company Comcast Corp.

The deal comes after days of talks between the two companies as pressure mounted on Karmazin to raise funds to address some $1 billion in debt due this year.

Karmazin said in a statement that he was pleased with the agreement, "particularly in light of today's challenging credit markets," and that it would enhance Sirius XM's capital structure and financial flexibility.

Analysts said the deal was the best option for Sirius shareholders, who would have been shut out had it filed for bankruptcy. Still, its hefty debt obligation remains: Sirius' total debt is about $3.25 billion, and a portion of Liberty's loan alone will bear interest of 15 percent.

"Their credit situation continues to be very tenuous," said Tuna Amobi, equity analyst at Standard and Poor's. "They live to fight another day. The only concern is that the day is not too distant. They may get through (a debt payment in) May but December may prove critical if credit market doesn't improve."

The deal also helps Sirius Chief Executive Karmazin stave off a potential takeover bid by EchoStar Corp, whose CEO Charles Ergen also runs Dish Network, a rival to Liberty affiliate DirecTV Group Inc, the largest U.S. satellite television provider.

Ergen had purchased hundreds of millions of dollars of Sirius' debt, including $171.6 million in convertibles maturing on Tuesday.

Its books temporarily assuaged, Sirius must quickly address critical operational questions, such as how it will sustain growth as the automotive market founders and consumers, worried about their jobs and retirement accounts, rethink discretionary spending.

Moreover, the company must cut costs, analysts say.

"Sirius XM has been unsuccessful in renegotiating some larger content contracts," Stanford Group analyst Frederick Moran, wrote in a note to clients, referring to deals with partners like Major League Baseball. "We believe Sirius XM must devise a strategy to lower content costs to remain viable."

TRYING TO REFINANCE DEBT

Sirius has been trying to refinance debt since its acquisition of rival satellite radio provider XM, which was approved last July.

Under the agreement, Liberty would first provide a $280 million senior secured loan to Sirius XM, of which $250 million would be funded on Tuesday to help the satellite radio company repay the $171.6 million in notes due today.

Then Liberty would provide another $150 million loan to XM, Sirius XM's wholly owned subsidiary, and also purchase up to $100 million of XM's credit facilities.