Karmazin’s Miscalculation

Decision to Hold Off on Refinancing Debt Left Sirius XM in Vulnerable PositionKarmazin's Miscalculation 1

Mel Karmazin has faced numerous struggles as the head of Sirius XM Radio Inc., but it was one badly timed move last year that ultimately left his company exposed.

Late Monday, it appeared that John Malone’s Liberty Media Inc. was close to taking a large stake in Sirius XM, an investment that would delay for now the day of reckoning over the company’s debt.

Sirius representatives declined to comment. The more than $3 billion Sirius has coming due over the years, and in particular the $175 million maturing Tuesday, has led to Sirius’s vulnerability to investors looking to tap into Sirius’s assets.

Last summer, after the long-awaited merger of Sirius with rival XM was finally completed, Mr. Karmazin needed to refinance more than $1 billion in debt that the combined company needed to pay off in 2009. But the 65-year-old chairman decided to hold off. The refinancing terms available, he said during an interview in early September, were “ugly” and he was under “no pressure” to get it done immediately.

Karmazin's Miscalculation 2
Not long after he made those remarks, credit markets froze, making refinancing even more challenging. As the economy faltered, so did Sirius XM’s prospects. The company lacked the means to pay off a $300 million bond that was coming due on Feb. 17, and had to resort to cutting deals one by one with investors, gradually taking the outstanding amount down to $175 million.

But the looming deadline provided an opportunity for Charles Ergen, who controls Dish Network Corp. and EchoStar Corp. Earlier this month, he stepped in and bought the bulk of the remaining $175 million of the bond, on top of some convertible notes maturing in December. He came in at the eleventh hour, striking a deal with a major hedge-fund bondholder at the start of the month, just as its lawyers and accountants were putting the final touches on an agreement with Sirius, a person familiar with the matter says. The idea was to use the debt to force Sirius into an agreement with Mr. Ergen.

But rival Liberty Media didn’t want to give Mr. Ergen the upper hand, and it too entered talks with Sirius. On Monday Sirius was still debating its options, but appeared to be near a deal with Mr. Malone’s Liberty Media. An offer from Liberty would allow Sirius to escape a bankruptcy filing now, but it might still face a liquidity crunch later in the year.

Mr. Karmazin’s financial miscalculation is an odd coda to a career in which he often displayed acute timing. When he was running Infinity Broadcasting, he took the company public in 1986, private in 1988 and public again in 1992, amassing a fortune in the process. When Westinghouse, now known as CBS, bought Infinity in 1996 for $3.9 billion, Mr. Karmazin, who held seven million Infinity shares, became Westinghouse’s largest individual stockholder.

As part of the deal with Westinghouse, Mr. Karmazin stayed on as head of the combined company’s radio and outdoor assets. By the time Viacom Inc. bought CBS in 2000, Mr. Karmazin had ousted the man who hired him, CBS Chief Executive Michael Jordan, and was running the whole company. In 2001, he became president of Viacom.

But Mr. Karmazin repeatedly clashed with Viacom’s chief, Sumner Redstone, and he quit in 2004.

That same year, Mr. Karmazin said he was joining Sirius Satellite Radio, where he also became a major shareholder. At the time, the company was a scrappy No. 2 behind XM Satellite Radio Holdings Inc. But Sirius had just signed a deal to bring in radio heavyweight Howard Stern, who had been one of Mr. Karmazin’s protégés when he ran Infinity. The executive believed that Mr. Stern would have the star power that could turn Sirius around.

When Mr. Karmazin joined, the company’s revenue was $66.9 million, and it had 662,000 subscribers, far behind XM’s 2.5 million. A year later, Mr. Karmazin had boosted revenue to $242 million and subscribers to 3.3 million. He made bold programming moves, such as luring Nascar away from XM. And he personally invested in the company, spending some $21.5 million of his own money buying stock over time, on top of stock that came as part of his compensation.

But growth didn’t come fast enough at either satellite-radio company to satisfy investors. Many favored a merger, a deal that would face severe regulatory scrutiny.

Nevertheless, the companies announced their tie-up in 2007. It took regulators 17 months to approve the deal, during which time both companies’ stocks languished and subscriber growth slowed. When the deal closed last July, Sirius stock was trading at $1.58. It closed Friday at 10 cents.

Now, Mr. Karmazin’s prospects seem bleaker than ever. The recession in general and poor car sales in particular have stunted Sirius’s subscriber growth and crippled its plans for expansion. If Sirius avoids filing for bankruptcy, Mr. Karmazin could once again be facing a future of working for a new boss, a scenario that hasn’t worked well for him in the past.

[Read: wsj]