Almost eleven months after the Department of Justice approved the merger between Sirius and XM, two companies that offered competing subscription services to satellite radio, the newly formed company, Sirius XM, faces the prospect of bankruptcy as early as tomorrow after $175 million in debt matured on Sunday. Even though Sirius XM has been able to cut costs as a result of the merger, a tight credit market and a sharp decline in new automobile sales– a primary distribution channel for satellite radio– have hurt the company. On Friday, Sirius XM did effectively postpone the maturation of about $227 million in debt until 2011, in exchange for a $9.5 million fee and increased interest payments to its debtholders.

Sirius XM CEO Mel Karmazin has rejected repeated offers by Charlie Ergen, the CEO of Dish Network and its sister company EchoStar, to purchase much of Sirius XM’s $3.2 billion in debt in exchange for control of the company. Even though Ergen has apparently agreed to allow Karmazin keep his position at the top of Sirius XM, Karmazin has demonstrated preference for Liberty Media Corp. and CEO John Malone as a white knight. This is possibly due to a public dispute between Karmazin and Ergen that occurred when Karmazin was the CEO of Viacom. In 2004, when Dish Network challenged the carriage fees it paid to Viacom, Ergen published Karmazin’s home phone number and encouraged Dish subscribers to call Karmazin to complain.

Of course, Karmazin’s strained personal relationship with Ergen cannot serve as a legitimate basis for rejecting his bids for control of the company. Sirius XM stockholders may begin to object to Karmazin’s refusals or Ergen may initiate a proxy battle or hostile tender offer to take control of the company without Karmazin’s approval. With bankruptcy looming, Karmazin will be forced to consider the best interests of Sirius XM’s shareholders and debtholders, even if selling control of the company means losing his job.

Austin Broussard

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