Is Sirius XM seriously toast?

If you're an investor, it's not looking good. But if you're a subscriber, you should have nothing to worry about even if the company files for bankruptcy.

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By Paul R. La Monica, editor at large

Shares of Sirius XM are now nearly worthless as investors continue to worry about the company''s debt obligations.

NEW YORK ( -- It's not often that a company with a stock trading for just six cents a share makes headlines. But when that company just happens to be the employer of Howard Stern, you can understand why it's in the news.

Sirius XM (SIRI), the only satellite radio game in town, is in desperate need of a savior. The company's stock has plummeted in the past year due to concerns about how it will pay off its debt load, which is about as big as Stern's ego.

And shares plunged more than 45% Wednesday following several reports late Tuesday that the company may now actually seek bankruptcy protection to escape the clutches of media mogul Charlie Ergen.

Ergen, the chairman of satellite-television provider Dish Network (DISH, Fortune 500) and set-top box maker EchoStar (SATS), owns a sizable chunk of the $300 million tranche of debt that will mature on Feb. 17. He is also said to have made a takeover offer for Sirius XM that Sirius XM has turned down.

A spokesman for Sirius XM had no comment for CNN Tuesday evening about the bankruptcy reports, and the company would not comment Wednesday morning either.

But Sirius XM did put out a press release Wednesday to let subscribers know that Tom Petty's "Buried Treasure" show would now be available on the Deep Tracks channel on Sunday evening.

That's kind of fitting since the title of one of Petty's biggest hits -- "Free Fallin' " -- is an accurate portrayal of the stock price. The song also includes the lyric "Gonna free fall out into nothin'. Gonna leave this world for a while." Ouch.

So what's the end game here for investors and subscribers? Is Sirius XM, which finally completed its ballyhooed merger last summer after a nearly 18-month antitrust review, dead?

Customers can breathe easy. Shareholders? Not so much

Well, if you're one of the nearly 19 million subscribers, there is hope. Even if the company files for bankruptcy, analysts think it was more likely to be a reorganization, not a liquidation.

"It's hard to imagine the company will go away. It will survive in one form," said Joe Bonner, an analyst with Argus Research. "There are assets there. Sirius XM has nearly 20 million customers that seem to like their service. That's nothing to sniff at."

But it's looking increasingly grim for shareholders. Even if the company resolves the issue of next week's debt maturation, it still has even more debt due later this year.

That's why analysts I spoke to last November were already worried about a possible bankruptcy filing this year, despite the company's assertion that debt was not crippling the company. If the company files for bankruptcy, investors are likely to be wiped out.

And even if Sirius XM CEO Mel Karmazin gives in and strikes a deal with Ergen, the most plausible outcome is that Ergen converts his debt into an equity interest in Sirius XM -- which would dilute the stake of existing shareholders.

I think that outcome is unlikely. I think that Karmazin, to reference another Petty hit, "won't back down." (Thanks for that suggestion, Chris Isidore!) It seems safe to say that Karmazin doesn't want to work for somebody else since that hasn't gone so well in the past. Karmazin, who was the head of CBS (CBS, Fortune 500) when it was merged with Sumner Redstone's Viacom (VIAB, Fortune 500) in 1999, left Viacom in 2004 after several years of squabbling with Redstone.

That leaves Karmazin with few remaining options. A sale of the company to another bidder, such as Dish Network competitor DirecTV (DTV, Fortune 500), creates the same issues that a Dish deal would. If Karmazin wouldn't want to cede control to Ergen, it's hard to imagine he would do so to DirecTV, whose biggest shareholder is John Malone, a media mogul with two capital Ms.

And in case you haven't noticed, it's not as if private sector investors are eager to rush in and buy soured assets -- a fact that Treasury Secretary Tim Geithner learned the hard way Tuesday.

"Karmazin's white knight would be someone that would give him money and stand in the background. But it's hard to find capital these days," Bonner said.

Lots of work to be done to make company profitable

So it looks like the company's fate will be decided by the creditors. David Kestenbaum, an analyst with Morgan Joseph & Co., agreed with Bonner that current shareholders are unfortunately out of luck.

But he maintains that that the business will eventually be worth a lot some day to somebody, be that Ergen or other investors. However, he thinks that a new owner will have to make significant changes to the way the company does business so that the monthly fees generated from subscribers actually can turn into consistent profits.

Kestenbaum said the balance sheet has to be cleaned up and that the company has to stop doling out lavish contracts for programming. Before Sirius and XM merged, each paid big bucks to lure popular personalities from free radio as well as for exclusive contracts with sports leagues to try and gain a competitive edge over the other.

But Kestenbaum said the only deal that either firm made that led to enough subscriber growth to pay for itself was the one with a certain shock jock that signed a 5-year, $500 million deal in 2004.

"Someone will make a lot of money off this company when you eliminate the debt and restructure the programming contracts that are not viable," Kestenbaum said. "Howard Stern is the exception. He's worth it."  To top of page

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