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Sirius, XM Merger Raises Questions Of Significant Debt

Associated Press file photo

The merger of Sirius and XM, the two satellite radio providers, will allow customers to hear channels from both services.

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The Associated Press

Published: July 30, 2008

As the purchase of XM Satellite Radio by larger rival Sirius Satellite Radio Inc. closed Tuesday, questions remained over whether the combined company can handle its $3.4 billion in debt, including $1.1 billion due next year.

Also murky was how quickly the two companies can mesh their technologies without angering consumers.

Most radios that play programming from Sirius and the former XM Satellite Radio Holdings are sold for cars, in before- or aftermarket installations, and automakers are notoriously slow to integrate new audio technology.

The nation's only two satellite radio companies have combined to become Sirius XM Radio Inc., based in New York, and trading under the symbol SIRI, which used to belong to Sirius.

Investors sold off Sirius shares Tuesday at their lowest price in nearly five years.

"The new company is going to face a lot of hurdles, both operating as well as financing," said Tuna Amobi, a Standard & Poor's analyst in New York.

He was disappointed by Sirius' accumulation of 280,000 net new subscribers for the second quarter, not as robust a figure as he had hoped for. Amobi is also concerned about higher interest payments.

Sirius' $1.3 billion of debt hasn't changed, but XM has taken on more debt and replaced some existing debt with other borrowing that carries much higher interest rates.

XM has $2.1 billion in debt, up from $1.7 billion at the end of March, according to company filings with the Securities and Exchange Commission.

Analysts had been counting on savings from the combination to offset higher debt costs, especially because neither company has made an operating profit.

Although Sirius expects to save $400 million and post adjusted earnings before interest, taxes, depreciation and amortization of more than $300 million next year, its comments about free cash flow troubled analysts.

Sirius expects to post positive free cash flow in 2009 but only after excluding satellite capital expenses. That implies its free cash flow will be negative if satellite expenses are included, said Shilpa Parandekar, senior bond analyst at Moody's Investors Service in New York.

As they waited 18 months for regulatory approval, the companies also have remained silent on many of the details of how they would combine their programming.

One known consumer benefit is the new ability to pay for only the channels one chooses, known as a la carte programming.

That service will require new or modified radios, and executives promised to have the radios available at retail within three months. However, most new satellite radio customers don't buy their radios at retail, because they come preinstalled in automobiles.

The companies haven't offered a timeline for automakers to install radios that allow a la carte programming, said Bob Williams of the Consumers Union, which opposed the merger.

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