Dish Network CEO tries to one-up Sirius XM

February 11, 2009 6:42:26 PM PST
A battle is brewing for control of Sirius XM Radio Inc., with uncertain consequences for the nearly 20 million people who use the satellite radio service to listen to music, sports and personalities from Howard Stern to Martha Stewart. With Sirius possibly heading into bankruptcy protection, the key player is satellite TV mogul Charlie Ergen.

The chief executive of satellite TV provider Dish Network Corp. and sister firm EchoStar Corp. is a former professional gambler who bought much of a $300 million batch of discounted Sirius bonds that come due next week. He offered to restructure the debt and inject several hundred million dollars into Sirius in exchange for control over the company, according to The Wall Street Journal.

His maneuvering comes as Sirius has few options left.

The satellite radio company has never made a profit despite signing up increasing numbers of subscribers, because it was burdened with massive interest payments on its debt. Analysts say it could have grown out of its problems, especially after acquiring rival XM last year, but it was hit hard by the credit crunch and poor auto sales - its main distribution channel.

Now time is running out for Sirius and its CEO, Mel Karmazin, the former head of media giant Viacom Inc. and a past adversary of Ergen.

Ergen holds the "cards that determine whether or not Sirius goes into bankruptcy," said Sanford Bernstein analyst Craig Moffett. "He's the one to whom interest is due."

Even in bankruptcy, debt holder Ergen would be assured a seat at the table for possible control of the company. Sirius has to refinance or repay nearly $1 billion of debt this year alone, and it's not clear how much Ergen holds and for which company - Dish or EchoStar, a provider of set-top boxes and satellite services that was spun off from Dish last year.

If Sirius files for bankruptcy, Sirius could see a shuffle of talent. Contracts such as its five-year, $500 million pact with Howard Stern could be terminated, and Stern could jump ship. Stern's publicist did not return calls for comment.

Sirius, Dish Network and EchoStar also declined to comment.

Joseph Clayton, the former CEO of Sirius who joined EchoStar's board last year, was not available to comment. Ergen did not immediately return a call for comment.

But it's clear that Ergen, a satellite TV pioneer known for his independent streak and tenacity, has confounded Wall Street with his latest move. Analysts sharply disagree about his motives.

Moffett believes that Ergen will probably get into the satellite radio business, which is more profitable than satellite TV, by winning control of Sirius on the cheap. Sirius is a growing business that's starved for capital, which Ergen has, Moffett said.

"All he's trying to do is buy an attractive franchise at a discounted price. If anybody understands the economic potential of a satellite business, it's Charlie Ergen," he said.

Todd Mitchell, an analyst at Kaufman Bros., had a different take.

Mitchell believes Ergen wants XM's satellites and ground network. XM's satellites occupy strategic orbital slots that would be very attractive to Dish and EchoStar because XM's satellites have a better line of sight to more locations, he said. Ergen's rival DirecTV Group Inc. also has better-positioned satellites than Dish, the analyst said.

The XM satellites, if obtained by Ergen at a discount, would "significantly enhance his own competitive position," Mitchell said. "I think that's the primary target here."

Tuna Amobi, an analyst at Standard and Poor's, said Ergen's pursuit of Sirius could be motivated by a desire to offer new services to more effectively compete with cable TV operators. He noted that Dish bought the rights to a portion of the wireless spectrum in a federal auction last year. The spectrum could be used for things such as mobile video.

Still, the capital that would be needed would require taking on more debt, Amobi said.

However the companies collaborate, a potential problem is the strong personalities of Ergen and Karmazin.

The two have locked horns before. In 2004, after talks broke down between Dish and Viacom over - among other things - the rates Viacom wanted Dish to pay to carry certain channels, Dish published Karmazin's home number and told subscribers to call him.

"I can't imagine Ergen and Mel Karmazin working that well together," said Matthew Harrigan, an analyst at Wunderlich Securities.

Shares of Sirius were cut in half to 5.5 cents on Wednesday. Dish Network gave up 17 cents to $12.98 and EchoStar fell 60 cents, or 4 percent, to $15.15.

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