NEW YORK EchoStar chief Charlie Ergen's surprising interest in Sirius XM Radio Inc belies his ambition to liberate his satellite television service from the living room into cars and mobile devices.
TV and radio broadcast in different bandwidths, making it difficult for the two companies to share many satellites. But Sirius XM has properties in space and on the ground that could help Ergen, who also controls the Dish Network satellite TV service, push into mobile video and advanced data services.
According to the Wall Street Journal, EchoStar holds about $400 million of Sirius XM debt, and the satellite radio company led by Mel Karmazin is scrambling to raise $175 million by a February 17 payment date to fend off a possible takeover threat and avoid default.
Analysts say any deal would hinge on a name from Sirius' not-so-distant past: Joseph Clayton, the former chief executive of Sirius Satellite Radio, which combined with XM Satellite Radio last year. Clayton joined EchoStar's board last October.
"There clearly is a relationship and some triangularity between Sirius and Dish and EchoStar, taking into consideration that Joe Clayton now sits on the board of EchoStar," said Janco Partner analyst April Horace. "Joe knows Sirius like the back of his hand."
Sirius XM has nearly $1 billion in debt due this year, prompting many on Wall Street to doubt its future given the sluggish credit market and a steep drop in car sales -- the biggest source of new satellite radio subscribers.
It is unclear what Ergen's interest in Sirius XM might be as his two companies declined to comment. He may want control of Sirius XM as a whole.
Another possibility is a debt-derived takeover in which EchoStar would become a secured debt holder with an eye on specific technology assets should Sirius seek bankruptcy protection.
Or Ergen could simply see the company as a cheap investment. Sirius' market capitalization has plunged to about $580 million, or below 20 cents a share, due in part to its heavy debt obligation and concerns about growth prospects.
Following the news on Thursday of Ergen's interest, Sirius' low-priced 9.625 percent bonds due 2013 jumped 9.25 cents to 34.5 cents on the dollar, according to MarketAxess. Sirius shares had closed up 16 percent to 16.5 cents a share.
REPEATERS AND ORBITS
One of many scenarios being discussed by analysts has EchoStar seeking a stake in Sirius and using the satellite radio company's repeaters to help build a network for delivering mobile video in cars and consumer devices.
Repeaters are on-the-ground devices that amplify a broadcast signal, ensuring satellite radio and TV can be received in big cities and places with tall buildings.
"It gets Charlie access to that repeater system, which could put him first to market by utilizing that spectrum that he just bought," said Horace, referring to wireless airwaves that EchoStar won at a U.S. government auction last year.
Analysts also said many of the satellites that Dish uses are not as well positioned as those of larger satellite TV rival DirecTV Group. EchoStar owns the satellites and leases capacity back to Dish for its broadcasts to customers.
Thus, Ergen may be interested in some of Sirius XM's satellites and their positions in orbit.
"The XM satellites are pretty standard fare which could be used for a variety of purposes and the slots are prime real estate from which they can broadcast to the entire North America," said Kaufman Bros analyst Todd Mitchell.
Ergen, once a professional gambler, is known on Wall Street as a smart and opportunistic operator who is always on the hunt for a bargain. He scooped up distressed satellite TV assets of Cablevision Systems Corp in 2005, for example.
"This is what Charlie Ergen does," said Tuna Amobi, equity analyst at Standard & Poor's. "He got those assets then at a bargain price."
Ergen could be aided by Clayton, a telecommunications industry veteran who ran Sirius from 2001 to 2004, when Karmazin replaced him. Clayton stayed on as chairman through July 2008, when Sirius completed its acquisition of XM.
But don't print the new letterheads just yet. There have been few debt-derived takeovers in recent memory, meaning that there would likely need to be some kind of friendly agreement between Ergen and Karmazin, both larger than life media industry veterans, analysts say.
"Debt-driven takeovers, if that's what they are doing, is very typical in vulture investing and hedge fund land, by taking control of a company by buying distressed bonds," said Shelly Lombard, a bond analyst with research firm Gimme Credit. "I can't say that I've ever seen a corporation take footholds through distressed debt."
(Additional reporting by Walden Siew, editing by Tiffany Wu and Derek Caney)