Amid a perfect storm, Sirius XM faces a shareholder lawsuit

It's difficult to make the case for conspiracy against the competition when XM and Sirius had no competition prior to their merger. Still, a shareholder plows ahead with his campaign against the merged entity, despite a global crisis.

In recent days, analysts have speculated on various ways that US satellite radio provider Sirius XM can complete the funding of its merger and stay afloat, including issuing more stock and even possibly taking the company private. While all of that remains in the realm of speculation, a Sirius XM shareholder whose name is all too familiar to executives who hail from Sirius, has amended his lawsuit in US District Court in California, in an effort to stop what he describes as a conspiracy to monopolize the satellite radio industry by eliminating existing competition and erecting barriers to new competition.

That process, claims shareholder Michael Hartleib, has already eroded the value of the company to major shareholders, and threatens to do further damage.

"On or about June 29,2008...Sirius Satellite Radio Inc. acquired XM Satellite Radio Holdings, Inc. in a stock swap. Prior to closing, the merger was described as a 'merger of equals' by management," claims the amended complaint filed last Tuesday. "However, as a result of the merger, Sirius Satellite Radio Inc. took on approximately $620 million in debt from XM Satellite Radio Holdings, Inc. The individual Board of Directors...and officers of Sirius...refinanced the debt on such bad terms that the merger severely damaged the value of Sirius." Hartleib's original suit was filed last July 14.

Whether the terms of the refinancing are actually bad may yet be borne out by history, but one thing we do know now is that the fact that any refinancing took place at all is somewhat miraculous. In an analysts' conference last September, CEO Mel Karmazin admitted he learned about debt maturities for XM that he wasn't aware of until very late in the deal-making process. Karmazin knew about $300 million in Sirius debt that would mature in February 2009, but in addition, XM had some $350 million in bank debt that would come due the following May, and another 400 million in so-called 441 converts for XM due the next December.

Karmazin said at the time he and his team were able to quickly find ways to cut $425 million in costs by combining operations with XM -- cutting deeper than originally anticipated. But financing deals, the nature of which the CEO himself seemed to wrinkle his nose at, would get his newly merged company over the hump, he announced at the time.

But that was September 9, just days prior to the onset of what many are calling the greatest financial crisis to strike America since the Great Depression. There are fewer sources of credit today for any corporation than there were just two months ago. So now, Sirius XM is faced with the possibility of having to supplement what financing it can still get through other means. Those other means could, at least in the short term, further dilute stock value -- and that's part of what angers Hartleib.

"In pursuing a plan to merge rather than provide interoperable radios, the Individual Sirius Defendants violated their fiduciary duties of care, loyalty and good faith," reads Hartleib's amended complaint. "The...Defendants had no consideration in sight immediately before the merger -- there was no value to be obtained for Sirius through the merger. In the circumstances immediately before the merger, the transaction was not worthwhile and was not made in a good faith effort to advance the corporate interests of Sirius. Instead the plan to merge and evade the interoperable mandate intentionally and recklessly put the interests of a criminal enterprise ahead of the interest of Sirius."

Elsewhere, the suit reiterates Hartleib's earlier arguments that Sirius and XM conspired to make it appear that the two companies could produce interoperable radios, when they actually never had any intention of doing so. Instead, he claims, the technique was some kind of smokescreen tactic to evade a Justice Dept. investigation, and to thwart any effort by the Federal Communications Commission to enforce its statutes against predatory practices among colluding broadcasters. Hartleib and former Sirius radio supplier US Electronics jointly sued the FCC after it issued its consent to the merger.

But the Court of Appeals for DC threw out Hartleib's FCC suit just days before he filed his amended lawsuit against Sirius XM, on the grounds that neither he nor US Electronics had proper standing to have filed it in the first place. Neither party could adequately prove to the Appeals Court that it was directly adversely affected by the merger, or by Sirius' or XM's activities leading up to the merger.

In a statement to BetaNews last night, Sirius XM spokesperson Patrick Reilly commented about last week's amended suit: "This is the latest in a string of court filings by this Plaintiff, all of which have been dismissed. We consider the latest filing baseless and will challenge it vigorously."

Conceivably, Sirius XM could issue more stock in itself, a move which, for a company in better shape, may dilute its current share value -- which would anger Hartleib. In a strange case of the double-edged sword cutting neither way, the company's shares -- which are trading today at an all-time low of $0.30 -- may not be able to be diluted much more. Analysts speculate that the company could make up for the low trading value by issuing a reverse stock split (what should be called a "stock join"), as much as 1-to-30. But the normal pressure from NASDAQ to resolve the problem of trading for less than a buck per share or face delisting, has been suspended for now, as that exchange resolved two weeks ago to avoid issuing delisting notices in the wake of the financial crisis.