Liberty and Sirius for All

Sirius XM Radio (Nasdaq: SIRI) will live to file another day.

The satellite radio operator was able to apparently thwart the amorous advances of EchoStar 's (Nasdaq: SATS) Charles Ergen, finding an opportunistic white knight in Liberty Media (Nasdaq: LINTA). Liberty will provide as much as $530 million in loans to Sirius, in exchange for a sizeable stake in the cash-strapped media company.

Sirius XM was certainly close to a curtain call, since it had to repay nearly $175 million of convertible notes later today.

Keep in mind that the terms of the loan are brutal.

• The first $250 million of the loans will be funded today, at a steep interest rate of 15%. That is a far cry from the 2.5% convertibles being redeemed today.
• Upon completing all of the loans, Liberty Media will be given preferred stock that is the equivalent of a 40% stake in the company.

A 15% return on borrowed money and a huge stake in one of the few media companies still growing these days? Where do I sign up?

However, it was "give me Liberty or give me death" for Sirius XM shareholders, as a bankruptcy filing would have likely wiped them out.And 40% in shareholder dilution is huge in terms of market cap, but it's not much of a factor when the market rightfully values Sirius XM based on its debt-padded enterprise value.

If you don't mind me saying so, you nailed it. In our Fool Poll last week, we asked you what would become of Sirius XM:

• It will file for Chapter 11 bankruptcy: 846 votes-25%
• Sirius will find a way to pay off its debt on its own: 392 votes-12%
• A third party will provide a capital infusion in exchange for a stake: 1,297 votes-38%
• A third party will buy Sirius XM whole-770 votes-23%
• None of the above: 68 votes-2%

Just a quarter of the poll participants figured that bankruptcy reorganization would be Sirius XM's destiny, a far more optimistic view than a market that had beaten down the shares in recent months. The most popular choice -- a third party providing a cash infusion in exchange for a stake -- was exactly what happened.

So where do we go from here? The interest-bearing investment ultimately buys Sirius time, but Liberty's stake can't do it alone. Sirius XM is still going to have to come up with a little more money to repay debt in May and December. More than half of the $350 million of debt repayments due in three months comes in the form of $100 million apiece owed to JPMorgan Chase (NYSE: JPM) and UBS AG (NYSE: UBS). If Sirius XM can successfully refinance there, it won't need much more than Liberty's bailout in the near-term.

Investors are certainly encouraged, with Sirius XM shares having more than doubled at one point this morning. Yes, the Liberty investment terms are stifling, but having little breathing room is better than having no breath at all.

Copyright © 2008 Universal Press Syndicate.