Bankruptcy Watch: Sirius XM May Be On The Verge — Or Wind Up Owned By EchoStar

imageUpdated: Looks like Mel Karmazin may be about to bite the bullet at Sirius XM (NSDQ: SIRI) Satellite Radio: The New York Times cites sources close to the company who say the company could file for Chapter 11 bankruptcy within days. The sources tell the NYT that Sirius XM has been working with restructuring expert Joseph A. Bondi of Alvarez & Marsal and bankruptcy lawyer Mark Thompson of Simpson, Thatcher & Bartlett to prepare the filing.

The filing — or just the threat of one — actually could bring Ergen more sharply into the picture. As has been reported over the past week, Ergen’s EchoStar (NSDQ: SATS) has been buying Sirius XM debt — apparently after trying to take control of the company and being rebuffed. Now EchoStar holds a $175 million tranche scheduled to mature Feb. 17 — and the company doesn’t have enough to pay the bonds. That amount literally is a drop in the bucket compared to Sirius XM’s total debt of around $3.25 billion but it could cause a tidal wave response.

As the WSJ reported earlier, Karmazin, CEO of the recently merged satellite radio company, told investors his options were to file for bankruptcy — wiping out the equity for him and other shareholders — or to make a deal with Ergen. Adding to the problem, a change of control would make hundreds of millions in debt due immediately. The NYT suggests the filing preparation may be intended as pressure to get Ergen to make a formal offer to convert his debt at a higher price.

Chapter 11, of course, is for restructuring, not the nuclear option that liquidates the company. The debtor continues to run the company but under the bankruptcy court’s jurisdiction and with input from creditors. Contracts can be renegotiated, which could put some of the hefty content deals at risk — including the one with Howard Stern. Sirius XM is a Delaware corporation so it would be filed there. Shares closed at 11 cents Tuesday, then dropped below 5 cents after hours. The 52-week high of $3.89 looks pretty good right now.

Update: WSJ reports that Ergen’s offer is still on the table and the two are in talks. Ergen wouldn’t buy out existing shareholders but would inject “hundreds of millions” into the company.