Sirius XM CEO Mel Karmazin Defends Company's Debt Actions
March 12 2009 - 1:32PM
Dow Jones News
Mel Karmazin, chief executive of Sirius XM Radio Inc. (SIRI),
defended on Thursday his decision-making, saying that it was in the
company's best interest to take on a high-interest loan and heavy
shareholder dilution from Liberty Media Corp. in order to stave off
bankruptcy.
Facing heavy debt maturities last month, Karmazin negotiated
with Liberty Media, the media conglomerate controlled by John
Malone, for $530 million in the form of high-interest loans in
exchange for a 40% equity stake in the company and seats on its
board of directors.
"Had we not accomplished this refinancing, I assure you that no
one involved with our enterprise would have liked the alternative,"
Karmazin said during an earnings conference call with analysts on
Thursday. "We hate to give up some of the synergies of the merger
to higher interest expense, but it was in the best interest of our
shareholders to do so."
The company's shares recently traded up 3 cents to 19 cents,
down about 94% over the past 12 months.
Sirius XM Radio has resolved its near-term liquidity issues, but
it's paying an interest rate of 15% on its loan from Liberty Media
as the economic downturn worsens, and Karmazin has been criticized
for passing up an opportunity to refinance more than $1 billion in
debt last summer after the merger between Sirius and XM was finally
completed.
"In this environment, when cash is king and liquidity issues are
something to avoid, we were not in a great position," Karmazin
said. "Rather than take the time here to review all the trials and
tribulations of having to raise money in this environment, I will
just say that we got it done, and many, many companies did not get
it done."
Karmazin said he would have preferred to have a lower interest
rate, but that 15% was acceptable at current market rates.
Now, the company finds itself with higher interest expenses and
slowing subscriber growth. On Tuesday, the company reported net new
subscriber additions of about 83,000, and, on Thursday, it withdrew
its long-term guidance for subscriber growth based on the sharp
downturn in the economy. For 2009, it declined to provide guidance
on subscriber and revenue growth but said it expects to exceed $300
million in earnings before interest, taxes, depreciation and
amortization.
Also, the company will likely find itself with forceful, new
voices in its boardroom, with Malone and Liberty Media Chief
Executive Greg Maffei expected as directors. The deal with Liberty,
which holds a majority stake in DirecTV Group Inc. (DTV), could
lead to new alliances between the satellite radio and TV
services.
"Accomplishing our financing is a reflection of the confidence
that very smart lenders and investors have in our company,"
Karmazin said. "They see a strong future and long-term benefits to
the enterprise as a result of the merger and executing of our
business plans."
In the short term, however, satellite radio faces a host of
challenges, including a weakening auto sales market, the company's
chief source of subscriber growth.
"2009 will be a terrible year for auto sales," Karmazin said.
"We obviously anticipated that in our operating plan. We assumed
that churn will increase, because consumers are facing challenging
times."
The company is also grappling with a plunge in retail sales of
satellite radio units.
James Meyer, president of operations with Sirius XM Radio, said
the company will roll out an application in the second quarter that
will allow subscribers to stream its content through the Internet
on popular gadgets like the iPhone and iPod Touch. The company
previously discussed these plans in December.
"We have also expanded the number of home devices that can
receive our content through the Internet, including an easily used
tabletop radio that is now sold through our Web site and major
retailers," Meyer said.
Meanwhile, Karmazin said Sirius also will continue to focus on
harvesting the merger's cost benefits. In the fourth quarter, the
company's total cash operating expenses fell 22%, and its pro forma
operating earnings were $31.8 million, compared with a loss of
$224.1 million a year earlier.
"As you saw in the [fourth-quarter results], financial
discipline gets us through the short term and when auto production
goes from 9 to 10 million cars produced to 12 to 13 million cars
produced, we will see substantial benefits," Karmazin said.
-By Nat Worden, Dow Jones Newswires; 201-938-5216;
nat.worden@dowjones.com