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Last summer, Mel Karmazin was rattling off his trademark one-liners to talk up the future of Sirius XM Radio, the combined company he ran that had just been blessed by regulators.
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Mel Karmazin, chief of Sirius XM
Times Topics: Sirius XM Radio Inc.
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David Scull/Bloomberg News
Charles Ergen, EchoStarís chief.
He was planning to cut costs and expand a business that was already a fixture in the lives of millions of Americans. ďForty-three cents a day ó itís not even vending machine coffee,Ē he said at the time, parrying a question about whether the softening economy might hurt subscriptions.
But now Sirius XM, the satellite radio company, has problems with much bigger price tags. It has hired advisers to prepare for a possible bankruptcy filing, people involved in the process said.
That would, of course, be a grim turn of events for the normally upbeat Mr. Karmazin, Sirius XMís chief executive, who had hoped to create a mobile entertainment juggernaut with stars like Howard Stern.
It is unclear how a bankruptcy would affect customers. Service is unlikely to be interrupted, but the company might have to terminate contracts with high-priced talent like Mr. Stern or Martha Stewart.
A bankruptcy would make Sirius XM one of the largest casualties of the credit squeeze. With over $5 billion in assets, it would be the second-largest Chapter 11 filing so far this year, according to Capital IQ. The filing by Smurfit-Stone, with assets of $7 billion, has been the yearís biggest to date.
Sirius XM, which never turned a profit when both companies were independent, is laden with $3.25 billion in debt. Its business model has been dependent, in part, on the ability to roll over its enormous debts ó used to finance sending satellites into space and attract talent like Mr. Stern (who was paid $100 million a year) ó at low rates for the foreseeable future until it could turn a profit.
The companyís success and failure are also tied to the faltering fortunes of the automobile industry, which sells vehicles with its radio technology installed and represented the largest customer base among Sirius XMís 20 million subscribers.
Sirius XM owes about $175 million in debt payments at the end of February that it is unlikely to be able to pay.
Sirius XMís problems could pave the way for a takeover by EchoStar, the TV satellite company, which has bought up Sirius XMís debt.
Mr. Karmazin has been locked in talks with EchoStarís chief executive, Charles W. Ergen, over Sirius XMís options, people involved in the talks said. The men are said not to get along, these people said, and Mr. Karmazin had rebuffed Mr. Ergenís takeover advances before.
Sirius XM hired Joseph A. Bondi of Alvarez & Marsal and Mark J. Thompson, a bankruptcy lawyer with Simpson, Thacher & Bartlett, to help prepare a Chapter 11 filing, these people said.
Documents and analysis are close to completion and a filing could come in days, according to a person familiar with the matter.
The threat of bankruptcy could also be part of a negotiating dance with Mr. Ergen, who could decide to convert his debt into equity instead of demanding payment.
In addition to the $175 million due in February, EchoStar also owns $400 million of Sirius XMís debt due in December. If Sirius XM files for bankruptcy, EchoStar could seek in court to take over the company. Mr. Ergen, however, may be able to negotiate to convert his shares before bankruptcy at an attractive rate and gain control of the company, these people said.
For Mr. Karmazin, the sale or bankruptcy of Sirius XM would be one of his first failures. He founded Infinity Broadcasting, sold it to CBS and later merged the combined companies into Viacom, where he had a notoriously difficult relationship with Sumner M. Redstone, the chairman, before being ousted.
Mr. Karmazin bought two million shares of Sirius XM at $1.37 a share in August. Before that, he had bought 20 million shares at an average price of $5 each. On Tuesday, Sirius closed at 11.4 cents a share.
Since the summer, the companyís prospects have dimmed.
ďIím not trying to paint the rosy picture, because we have challenges connected to our liquidity and certainly our stock price is dreadful,Ē Mr. Karmazin said in December. ďBut, you know, our revenues are growing double digits. Weíre growing subscribers. Weíre not losing subscribers.Ē
A spokeswoman for Mr. Karmazin declined to comment. A spokesman for EchoStar could not be reached.
Mr. Karmazin staked the success of the merger on nearly $400 million in annual cost savings and the potential to gain subscribers through deals with auto companies to put satellite radios into cars.
But satellite radio failed to win over many younger listeners, and competition from other sources slowed subscriber growth.