NEW YORK (Reuters) - The battle for Sirius XM (SIRI.O) might not be over just yet.
As Liberty Media Corp LINTA.O agreed to inject up to $530 million in loans to Sirius XM for a 40 percent stake in the satellite radio operator earlier this month, the battle appeared finished.
The move was seen as fending off a takeover attempt by Charles Ergen, whose satellite TV company EchoStar Corp (SATS.O) quietly amassed debt in Sirius and ended up in talks to take over the company.
But a closer look at the agreement between Liberty Media, led by John Malone and Sirius XM, led by Mel Karmazin, shows a few clauses that leave the deal’s status open - at least for now.
The first credit agreement for a $250 million term loan and $30 million of purchase money loans between Sirius and Liberty Media is a fairly simple one.
But the second agreement provides $150 million and does not close immediately. That funding is subject to Sirius XM getting other credit agreements extended and Liberty buying $100 million of its debt.
This second loan is also contingent on Sirius auditors not issuing any “going concern” qualifications on the company’s 2008 audited results — which usually mean a company is likely to go bankrupt without additional financing.
The deal with Liberty helped Sirius XM avoid a possible bankruptcy.
Liberty Chief Executive Greg Maffei said on a conference call on Wednesday that “some have suggested” a bankruptcy would be a positive for Sirius as it would allow it to renegotiate contracts with automakers and artists. He said Sirius was trying to renegotiate some contracts now to reduce costs.
“We’re hoping Mel is as successful as he can be at doing some of these things...but we are positioned OK, we believe, if that does not come to pass,” Maffei added.
In exchange for the loans, Liberty receives 12.5 million shares of preferred stock in Sirius, which become convertible into common stock once the deal receives antitrust clearance.
But the preferred stock is only issuable on the satisfaction of the conditions to funding the XM loan, giving Sirius a period of time in which it can find another deal.
“If, prior to April 15, 2009, we receive an alternative proposal that our board concludes in good faith is a superior proposal...our board may terminate the investment agreement in order to transact the superior proposal,” Sirius said in an 8K filing with the U.S. Securities and Exchange Commission.
“They have the option to bail on the whole thing,” Todd Mitchell, analyst at Kaufman Bros., said.
Maffei told Reuters in an interview that while Sirius is not allowed to shop itself around before April 15, it is allowed to consider a higher bid from another party. Liberty would have the right to match such an offer, he said.
The deal’s structure leaves the door ajar for EchoStar’s Ergen, a longtime rival to both Karmazin and Malone. While it is possible that he could return with a “superior proposal,” Maffei considers any third party involvement unlikely.
“It would be fairly expensive for someone to go over the top because there’s a bunch of penalties and they’d have to pay off our debt,” Maffei said, adding he was confident Liberty would complete the second stage of the deal with Sirius.
If Sirius were to accept another deal, the stock issuance and the second-phase loan would not occur. Liberty is also entitled to a $7 million termination fee and can demand that the first loan be repaid with a $14 million premium.
EchoStar declined comment. An external spokeswoman for Sirius also declined comment.
Even as Sirius is burdened with $3.25 billion in debt, it remains an attractive asset with 20 million subscribers. The only U.S. satellite radio provider, it is guaranteed to grow its subscriber base in new cars despite a plunge in car sales.
About half the new cars being sold have satellite radios in them and about half of those become satellite radio subscribers, Karmazin has said.
Maffei told Reuters Sirius XM was “a good company in unfortunate circumstances,” citing tight credit markets and plunging auto sales.
A satellite radio and television partnership could also provide synergies: Maffei said Liberty would look at co-marketing DirecTV, the largest U.S. satellite television provider, and Sirius XM to each other’s subscribers, do joint content deals, and consider a mobile video initiative.
Ergen’s talks with Sirius earlier this month involved taking over the company as Karmazin held equally intense parallel discussions with Malone, sources have told Reuters.
“I’m surprised they did it,” Mitchell said, referring to Liberty investing in Sirius.
“I think they took a defensive look because of Ergen’s involvement and then maybe the numbers worked for them. If he hadn’t served as catalyst, I’m not sure I would ever thought Sirius would end up with Liberty.”
(For more M&A news and our DealZone blog, go to www.reuters.com/deals)
Editing by Leslie Gevirtz