Echostar and Sirius-XM: What’s the plan?

The Wall Street Journal says that Echostar’s Charlie Ergen made an offer late last year to take control of struggling pay-radio operator Sirius, and was rebuffed by the company. Ergen’s suggestion was that one of his businesses inject enough cash to see the broadcaster through its current financial needs, and to avoid any potential bankruptcy threat.

Those needs are variously said to top $350m in near-immediate obligations, and around $1bn in overall debt. Ergen is nothing if not determined in his ambitions, and has already started buying some of Sirius-XM’s convertible bank debt. However – and this is important – even if he were to buy ALL of this convertible bank debt, AND that it was all converted to equity then it would give Charlie only 18% or thereabouts of Sirius. In other words he would have to acquire stock on the open market. And a price of 13 cents a share is not so very much especially if Ergen sees value at the end of the day.

And we tend to think he does.

But one must also ask whether Sirius-XM is actually going to default on its upcoming debt obligations? For this we will have to patiently wait. In this regard the decision to buy up this debt is a win-win for Charlie. He can profit from Sirius coughing up and rolling over the debt, AND he is in with equity should Sirius default. In other words this is a sound investment case either way.

However, could Ergen’s ultimate scheme see one of his enterprises actually mop up Sirius-XM. We think the answer must be a resounding ‘yes’. Some 18m subscribers take a pay-radio service, and the opportunity for cross-promotion, for harmonisation, and for further operational synergies are all there to be exercised.

The FCC might have some valid grumbles about a pay-TV operator acquiring a pay-radio player. But not too many.