Echostar Buys Sirius Debt: Takeover Thoughts or Just a Good Investment?

The news agencies are buzzing over a potential takeover bid by Echostar (SATS) for Sirius XM (SIRI). The Wall Street Journal initially reported that Echostar CEO Charles Ergan has been quietly buying up Sirius XM debt. Internet bloggers have jumped all over the story and have created mass confusion for investors in Sirius XM.

There is so much misreporting underway, that there no longer seems to be clarity as to exactly what it is Mr. Ergan is actually buying. The Wall Street Journal has made it abundantly clear that Mr. Ergan has been buying the Feb. 17 convertible debt. As the stock began to rise on that news, other agencies began reporting that he was in fact buying Sirius XM bank debt instead, and have created some outlandish stories around the topic.

We have also learned that if in fact Mr. Ergan is making a play for Sirius XM, all of the outstanding debt - if it were bought and converted to equity - would give Mr. Ergan only 18% of Sirius XM, which would require open market purchases to be made to give him a majority stake.

All of these “would be-could be” scenarios have a common thread. They all assume that Sirius XM is going to default on its February and/or May debt obligations, and therein lies the main problem with the focus of this week's events. No one has stepped back and questioned that perspective. No one, that is, except yours truly.

Here’s another perspective that does not involve conspiracy theories. To begin with, Echostar is not buying the debt. Mr. Ergan is. Having worked for a bond firm myself, my first thought was not that Mr. Ergan was making a play for Sirius, but he was simply making a good investment. The convertible bonds were trading nearly 20% below par. If Mr. Ergan believes as I do that Sirius XM will in fact meet its debt obligations, buying these bonds is simply a sound investment decision.

A smart investor, who dare I say may be in a position to have this sort of knowledge in advance, would be wise to make a near 20% profit in only a few short weeks when these purchases were made. Further proof of this may be found in the bonds themselves, which are trading at a premium of 105 and offer a very large negative yield. Typically, bonds that are about to be defaulted on do not trade at a premium, but rather a substantial discount as bondholders look to unload them as one would a used car.

Comments

[cos1000:]

asm61064,
We don't know if the XM sat's are even compatible. If he is looking for ground based repeaters and transponders to develop a WiFi system or for any other reason, then why not just lease them and exchange that for some debt. Raising revenues by leasing excess capacity in the Sat and Ground based systems is probably already part of Mel's plan. Really I am having a hard time seeing why, if Sirius Xm had equipment for sale, they wouldn't just sell it on the open market to the highest bidder.

Feb 10 01:21 PM

[yomann:]

that was my favorite scenario -- xm sats (already in orbit) have got to be worth a ton! and the repeaters on the ground not being used is another -- couldn't that be liauidated while still retaining the bandwidth and the content? Especially since the interoperables are coming out, you'ld think that you could send xm stuff through the sirius bandwidth.

Feb 10 01:23 PM

[cos1000:]

One other point and then I have let this go for now. Holding convertible bonds does not give the holder of bond any right to convert shares at current market price. It gives them the right to convert to common shares at a predetermined "convert price" when the bond was purchased. It is only the company's right to offer payment of the principal, with shares at current or near market price as we have seen on the $125M pay off of the Feb 09 debt. Holding the last of these bonds, even if true, does not give Ergin the right to convert shares at market prices to gain voting writes unless SXm agrees. The convert price on these bonds is well over $3/ share and will not be exercised by the holders. So if Sirius pays the principal due, Ergin's trump position is voided. There is more to this than is being presented or there isn't anything to it at all......

Feb 10 01:29 PM

[relmar2003:]

Cos1000 You inadvertinately answered your own question. Why not sell on the open market to the highest bidder? Well now Ergin can give Sirius some reasons to sell it to him. at a good price...Or your right, theres nothing to this at all..And volume today agrees with you..This buzz is dead, and its trading like normal today...News is needed now, not rumors...

Feb 10 01:41 PM

[relmar2003:]

O, and this isnt Relmor...I hate that guy...This is RelMAR...Totally different...
Dont taser me bro!!!!

Feb 10 01:50 PM

[relmar2003:]

Whatching Sirius trade today is like watching two old people do something.....If I can only remember...

Feb 10 01:56 PM

[bdp:]

Simply put, Sirius is a promising company with highly valuable assets that has had the major misfortune of bad timing to force it's illness. That is all. Now being that Sirius is injured, the vultures will come from every direction to pick and prod and may end up killing Sirius in the end. However, Sirius will not go down without a strong fight. This is why we have virtually no news from them. Would it make sense to reveal information that could be used to undermine their strategies? This has been an all out war my friends where the strong shall survive and the weak be devoured. I think it just may be that Sirius was behind the release of the Echostar news. If this clandestine move on ES part to attempt to buy up stock on the cheep to acquire a controlling share interest had indeed been something in the works, Mel may have seen the threat as accelerating toward him and quickly snubbed it. If the news had been released last year right after the merger, would this not make Mel and co. look like a bag of buffoons? This would have certainly sparked alarm and exacerbated fear and scrutiny among investors about severity of the fallout behind the already disastrous merger. And for ES, drawing attention to this plan would certainly lead to them bumping against complications that may push Sirius out of reach. But wit the current situation, how better to undermine ES's plan by leaking information and finally exposing ES to the masses. After all, the specifics of this information contain elements that neither side would want to be made public for obvious reasons. For ES, even with the dilution of the extra shares, buying a controlling interest in Sirius would be a huge step toward acquisition. If not the entire company, at least the vital most valuable parts. As we all know, Sirius does own some extremely valuable technology that would integrate nicely with ES. As we now know, apparently ES has been licking it's drooling chops over this for some time. This is why I actually believe this WSJ crap. Because it is Mel that leaked it to shove Sirius out of ES's reach. An sharp upper cut to ES's jaw as Sirius has it's back to the ropes. The idea is to keep Sirius intact as it is. Parting itself to ES would serve no purpose for Sirius other than whoring itself for the sake of survival. As viable of an option this may be, it is most certainly the last resort. However, if Sirius can resist being bullied into a corner and manage a mutually beneficial agreement with ES (which I believe they now may be), the two companies may be able to support each others needs without any major regulatory difficulties. And by the recent example, it looks like any attempt to buy up large blocks of stock cheep are going to be met with an instant reaction that will push the price way out of ES' reach. And now everyone knows, without knowing anything.

Feb 10 02:22 PM

[163888:]

cos1000, I think you got those shares mixed up. We just had a vote on 3.5 billion because there was not really any shares left outstanding to do much of anything. If I am remembering correctly they had just about 4.5 billion after the merger with XMSR. Now if they used a few hundred to take out the other parts of the Feb. debt, after of course the original shares for the first part of Feb debt (the part before the vote). I am sorry but if you could direct me to the filing that shows something different I would be thankful. Until then I believe it is closer to just over 3 billion then the 4 billion you speak of.

Feb 10 04:44 PM

[drevil6406:]

bdp,
Good post! Also lets not forget something that Booie brought to our attention and goes well with these ancient words of wisdom......"the enemy of my enemy is my friend"......... Who owns Direct TV and the WS Journal again..........?

Feb 10 05:08 PM

[killerkaul:]

Guys........... afterhours sp. .095. hmmmmmm.

Feb 10 05:16 PM

[killerkaul:]

cont. ........... as low as .08.

Feb 10 05:17 PM

[drevil6406:]

killer,

I see .1080 as the low for the day. where did you come up with .095?

Are we going to play that farce of a game again.....like the .08 cent low from a couple weeks ago!

Feb 10 05:21 PM

[killerkaul:]

asm6............. was watching my ameritrade streamer................. showed a low of .095, then dropped to a low of .08. Around 3 millionish or a little more volume ??? ..killer.

Feb 10 05:38 PM

[killerkaul:]

cont. .............. that's afterhours pricing.

Feb 10 05:40 PM

[drevil6406:]

interesting....did you see the latest? NYT supposedly saying SIRI prepping BK papers

Feb 10 05:48 PM

[killerkaul:]

News on siri possibly filing bankruptsy papers................... maybe a manipulation of Ergen by Mel K. ...... hence the after hours drop??? ...killer

Feb 10 05:50 PM

[drevil6406:]

killer.....I like the way you think! In any event.....nothing to lose at these prices...I'm all in anyway....whatever the news! Same way I am with anything I believe in....I'll ride it to the ground before I'l give up on it. I have faith in Mel....and more importantly...I see a company that has value....and 20 Million paying subscribers. They have so many directions they can go....it's more fun than buying a lottery ticket....and definitely more interesting! I really hope Mel pulls it off!

Feb 10 06:06 PM

[killerkaul:]

Guys............... now is not the time to go weak in the knees................ NO FEAR ......................... follow the Big Blue Dog. ...killer.

Feb 10 06:30 PM

[IBuriedtheU...:]

What's all the smarmy know-it-alls got to say about today's cut in half haircut?

Let me guess.... it doesn't fit your self-educated calculations. Hard to explain how this love-stock could treat you so bad, isn't it? Just can't imagine Mel & Co. make you look like complete hot-air buffoons. Shocking. And all the cheerleaders who rooted you on..... how could your limited wisdom let them down like that? Kind of hard to imagine which is the bigger fool now. Is it the leader..... or the follower?

Perhaps you all need a group hug..... to tell each other every thing is going to be all right and Mel is going to coming riding in and save you all from humiliation. Try to razzle dazzle each other by throwing a bunch of fancy Wall Street words and acronyms around.... and then make claims how SIRI is testing a new low, so other new readers think you really know what you are talking about, when really you & I know better, and know you don't have a clue. Good luck with running your mouth much more than your ears.

Maybe next time those fakes won't be so eager to criticize others. Maybe now they will understand that Mel doesn't give the first flying flip about them and all their flag waving.

Please, and you know which ones I am talking to, please explain how this happened to such market scholars as yourself?

Feb 12 12:32 AM

[killerkaul:]

smarmy body .......... Woof Woof.

Feb 12 10:25 AM