NEW YORK, Feb 9 (Reuters) - Echostar (SATS.O) may need to spend another $100 million or more if Chief Executive Charlie Ergen wants to take control of competitor Sirius XM Radio Inc (SIRI.O), based on reports that he has been buying up the company’s debt, according to research firm CreditSights.
The Wall Street Journal reported last week that Ergen has purchased most of the $175 million in Sirius convertible debt expiring in February and owns more than half of a $400 million tranche coming due in December.
The paper added on Monday that Ergen had approached Sirius last year with an unsolicited offer to take control of the company, but was rebuffed.
Analysts have said Ergen may have his eye on Sirius as a means of helping Echostar’s push into mobile video and advanced data services. For details, see [ID:nN06405844]
News of the bond purchases has also led to speculation over whether Ergen will use the purchase to push for a bankruptcy or use the debt as leverage to take control of the company outside of bankruptcy.
“It’d be better for him not to put it in bankruptcy and to buy it as a going concern,” said Jake Newman, analyst at CreditSights.
However, “I think that he is going to use whatever leverage he has and that includes a threat to put the company into bankruptcy if he is really interested in gaining control,” he added. “I think he’s fully willing to play his cards in as aggressive a fashion as possible and he has a good hand.”
Pushing Sirius into bankruptcy may enable the company to make savings by canceling contracts that Ergen believes are too expensive, however this could backfire in disrupting relationships with the company’s employees and contractors.
A bankruptcy may also make potential subscribers hesitant to pay for the service, and would leave the company’s current management in charge, Newman said.
If Ergen were to covert the convertible debt at Sirius’ share price as of last Thursday, when the Journal first reported he had been bought the bonds, he would control around 40 percent of the company, said Newman.
“If Ergen swaps his debt for equity at current equity prices for face value, EchoStar would only have to buy another $125 million worth of shares, we estimate, to give him 50 percent,” Newman said.
“Then he would be able to control the Board of Directors and replace management,” he added.
Sirius’ shares jumped to 0.165 cents on Thursday before falling back to 0.11 cents on Monday.
To control the company under a bankruptcy proceeding, meanwhile, Ergen may still need to buy additional bonds, Newman said.
Sirius’s 2.5 percent convertible bonds due February 15 jumped 7.5 cents to 105 cents on the dollar on Friday, its last recorded trade, according to MarketAxess. Its 9.625 percent bonds due 2013 have jumped 11.5 cents to 36l.5 cents on the news.
“Ergen’s purchases of subsidiary bonds would probably give him power over a reorganization proposal in a bankruptcy,” Newman said.
“Depending on the rate of equitization of different layers of the capital structure, in bankruptcy he would need to spend at least $112 million at current bond prices to achieve hard control,” he added.
Reporting by Karen Brettell;