By Relmor Demitrius
Sirius XM investors can argue about what happened in February of 2009 till they are blue in the face. One investor screams about Charles Ergen while another might explain to another about the evil nature of the banking system. Others yell for Mel Karmazin’s head (CEO of Sirius XM Radio (Nasdaq:SIRI)) and claim he botched financing options before the deal with Liberty Media (NASDAQ:LINTA), now held within Liberty in their tracking stock Liberty Capital (NASDAQ:LCAPA), was even necessary. Some blame the FCC or the NAB entirely. Whichever train you board on this issue, there is sure to be a passionate and heated debate among stockholders as to what really happened from July of 2008 to February of 2009. Let’s lay some groundwork first before we tackle the title of this article.
Sirius XM completed the merger in July of 2008 after the longest delay in FCC history. Thinking back over the near monopolies formed under the watchful eye of the FCC, one immediately might begin to wonder what was so dangerous about merging these two companies? Exxon/Mobile merger, which directly impacted every consumer of oil in the country, didn’t take anywhere near as long. Putting aside this startling aspect of this process for one second, let’s now look at the time frame Sirius XM was allowed to merge as well. In July of 2008 the corporate bond market was floundering, if alive at all. Sirius XM went to the market and asked for over 1 billion dollars to refinance debt so they could be allowed to merge into one company in possibly the worst economic conditions in 3 decades. They got the money, but the deal was terrible. High interest rates and lent shares simply given to allow hedging not even acquired on the open market was considered the reason for the stock tanking to under $1. Now add in a debt tower in 2009 that would also need an additional 1 billion dollars to remove, and the company was again facing the very real possibility of once again hitting the bond market only a few months later. Did the bond market get better? No. It actually got worse.
Banks were struggling and the appetite for corporate debt dried up. Sirius XM owed money due to maturity in February, May, and December. The February debt was able to be cleared with cash on hand easily. They also removed some by giving away shares at fire sale prices, with some conversions happening under 20 cents a share. For a company that was trading over $3 a share even after the merger was announced, this was a huge blow to their ability to remove this debt. If they had planned on exchanging debt for shares, their plan was derailed by a tanking stock and bond market. Declarations of them going bankrupt and not being able to pay or refinance this debt were coming around every corner. Apparently Sirius XM investors were going to get another “emergency” deal, and hopes of a huge post merger explosion of momentum and abilities to manage their debt load were slowly fading into gasps of panic and confusion. Mel had promised the 2009 debt wasn’t a problem. In fact, he went on record many times in 2008 to reassure investors that the bank debt due in May, the only part of the debt that couldn’t be exchanged for shares, regardless if Sirius XM wanted to or not, would be extended by the banks. If they did this, the debt from February and December was now very achievable in clearing without a major injection of new money.
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