Liberty Media Buys Into Sirius XM Radio

It turned out that John Malone was a white knight after all.

Sirius XM Radio, desperately trying to fend off bankruptcy and a takeover attempt by Dish Network chairman Charlie Ergen, instead turned to Liberty Media chairman Malone last week, inking a deal that will pump about $530 million into the satellite radio giant's coffers in return for a 40% interest in the company.

The decision to turn to Malone ends what has been weeks of speculation concerning Sirius' fate. Earlier this month, the satellite radio giant struggled to raise $175 million, the amount it owed to Ergen after the Dish Network chairman snapped up Sirius debt through his affiliated companies. In the meantime, Sirius was trying to fight off a takeover attempt from Ergen, who had earlier proposed a $500 million deal for a controlling interest in the company that was rejected by Sirius' board of directors.

With the Liberty deal, Sirius gets more money ($530 million) and has to give up less control (40% of its outstanding equity).

The cash infusion will come in two phases: the first includes a $280 million senior secured loan from Liberty to Sirius, $250 million of which will be funded today. The proceeds of that loan will be used by Sirius to repay $171.6 million of its maturing 2.5% convertible notes due Feb. 17, 2009, and the balance will be used for general corporate purposes, including working capital and transaction costs. The loan will bear interest at a rate of 15%, mature in December 2012, and be secured by the assets securing Sirius' existing term credit agreement.

The second phase provides an additional loan of $150 million to XM Satellite Radio, Sirius' wholly owned subsidiary. Liberty has also agreed to offer to purchase up to $100 million of the loans outstanding under XM Satellite Radio's existing credit facilities from the lenders.

Upon completion of the second phase of the Liberty investments, Sirius will issue Liberty an aggregate of 12.5 million shares of preferred stock convertible into 40% of the common stock of Sirius XM.

Liberty will receive seats on the Sirius board of directors proportionate to its equity ownership. It is expected that Malone and [Liberty CEO] Greg Maffei will join the Sirius XM board. Liberty's obligation to consummate the second phase of its investment is subject to various closing conditions.

Just how Sirius will fit in with Liberty is unclear. As part of Liberty Capital, the 40% Sirius interest will be housed with Liberty's vast minority interests in several diverse companies, including Time Warner Inc. (3%), Viacom (1%) and its 100% stake in the Atlanta Braves major league baseball team. Because federal laws would likely prohibit Liberty's other big satellite holding — DirecTV — from using any of Sirius's spectrum for its own use, a combination of the two would seem unlikely.

”We believe that Liberty views this transaction primarily as an attractive financial investment,” Barclays Capital satellite analyst Vijay Jayant wrote in a research note last week.

Even Maffei, in an interview with the Wall Street Journal last week, was hard pressed to find any benefit in combining Sirius with DirecTV.

“There are few operating synergies,” Maffei told the Journal.

In the end, Sirius may end up being an investment that Malone sells later at a hefty profit — despite its problems, few believe that Sirius is accurately valued at 13 cents per share, its closing price on Feb. 19.

In a research note, Wunderlich Securities analyst Matt Harrigan wrote that Sirius could become a marketing partner along side DirecTV, but seemed to see the deal as more of a financial play for Liberty.

“Liberty is yet again being opportunistic in a distress situation, recognizing that access to capital is what is now relevant rather than uncertain discounted cash-flow valuations,” Harrigan wrote. “We believe that Liberty is getting a 40% equity interest in a viable Sirius XM at a compelling price.”