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Can Sirius XM Radio handle its $3.4b debt?

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Associated Press / July 30, 2008

As the purchase of XM Satellite Radio by larger rival Sirius Satellite Radio Inc. closed yesterday, 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 companies can mesh their technologies without angering consumers. Most radios that play programming from Sirius and the former XM Satellite Radio Holdings Inc. are sold for cars, 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. Mel Karmazin, chief executive of Sirius, will have the same job at the new company.

Investors sold off Sirius shares yesterday 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.

He was disappointed by Sirius's accumulation of 280,000 net new subscribers for the second quarter, not as robust a figure as hoped for.

Sirius's $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 total debt, up from $1.7 billion at the end of March.

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

While 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.

She also noted $1.1 billion of debt is due in May 2009. Both companies' credit ratings are under view for a possible downgrade.

But David Frear, Sirius' chief financial officer, said the combined company will have $70 million in additional interest payments, which the $400 million in savings can easily cover. As for satellite expenses, Frear said these costs occur only once in 15 years or so.

The companies 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 will require new or modified radios, and executives promised to sell such radios at retail within three months. But most new satellite radio customers don't buy their radios at retail because they come preinstalled in automobiles.

In the past, the companies have mentioned offering a "best of both" service for $17 a month, compared to the current price for one of the services at $13 a month.

Sirius and XM haven't disclosed which programming the best-of service will include. And there's no guarantee Howard Stern will be available to XM customers or that Sirius customers will see Major League Baseball games, for instance.

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