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Dueling Fools is a two-round affair and yet, to look at the numbers, I'm well behind in this debate about the future of Sirius XM Radio (Nasdaq: SIRI ) . More of you agree with my friend Rick -- you're bullish about the prospects for this satrad supplier.
If only the company's financials justified your optimism. They don't.
Beware the debt delusion
See, while a $530 million capital infusion supplied by Liberty Media (Nasdaq: LINTA ) and accompanying bank lines supplied by a syndicate led by JPMorgan Chase (NYSE: JPM ) and UBS (NYSE: UBS ) gives the company time, it doesn't solve the long-term problem. Look at the math.
Liberty gets 40% of Sirius XM upon conversion of its preferred stock, which means that the satrad star's 3.9 billion shares outstanding will balloon to 6 billion sometime between now and 2012, when the loan expires. That's a huge problem for existing investors. Dilution has the mathematical effect of demanding ever-higher rates of growth in order to produce meaningful returns.
Here, it's as if patient Sirius XM investors, shivering as they wait in the cold, hoping at last to buy a ticket to see the Hottest New Act in Town, were then told to move to the back of a three-mile-long line.
And that's not even the biggest problem. Sirius XM is now on the hook for paying 15% a year over four years on $530 million in new debt. That's close to $80 million a year. For perspective, consider that Sirius XM paid $137.5 million in cash interest on $3.3 billion in debt during 2008.
Talk about scary math. Debt payments could double before revenue does, which means that future refinancings are virtually guaranteed. Can you imagine the next deal? Liberty's 15% cut could look cheap once a government-funded bout of hyperinflation kicks in.
Stern about Stern
The net effect of this debt death spiral is that it'll force Sirius XM to choose between talent and solvency. CEO Mel Karmazin won't have the resources to broker another $500 million deal with shock jock Howard Stern.
Yet, to listen to Stern, that's the least he'll take. He told a caller in December that he'd likely retire after his contract expires in 2010. "If I could work out a deal with Sirius where I work on my own terms, I'd think about [re-signing]," Stern told listeners.
Say what you want about deals with the major sports franchises and NASCAR, Stern leaving Sirius would be a disaster -- it's one of the few fiscal successes of a fiscally challenged company.
Readers argue that Stern has between three to four million listeners. A 2006 study pegged that number at closer to five million. Both estimates could be low, now that Sirius XM has more than 19 million subscribers combined. Either way, Stern serves at least 20% of the service's listeners.
Karmazin pays $100 million to Stern annually for entertaining these subscribers. I know that sounds like a lot -- and it is -- but it's also just 11.6% of Sirius XM's cost of service in 2008. Stern, in short, is a moneymaker for satrad.
He may also be part of the reason Sirius XM added to its subscriber base in the fourth quarter, when similarly styled entertainment services lost viewers. TiVo (Nasdaq: TIVO ) and Dish Networks (Nasdaq: DISH ) , notably.
Please don't call Web radio "podcasting"
Stern knows he has options. He's knows that he is valuable to Sirius XM. He's said as much on air. Even if his retirement threat is only a negotiating tactic -- I'll bet that it is -- the very fact that he's negotiating is a problem.
Sirius XM isn't in a position to negotiate. If it were, Karmazin would never have agreed to pay Liberty 15% interest. This business needs more than growth. It needs growth and generous creditors in order to ensure its survival.
And it needs inept competition, which it won't get. Web radio is a real alternative thanks to technology from Akamai (Nasdaq: AKAM ) and Limelight Networks, among others, for live streaming. The Olympics were streamed. Baseball streams live audio of its games. Sirius XM streams, too. Why wouldn't Stern stream his own show? He could, on the cheap, make more money, and still keep regulators at an arm's length.
Satellites are becoming less necessary by the day, Fools, and that erodes what was once a key advantage for Sirius XM. What remains is superior content ... that it will soon be unable to afford.
Sirius XM was a Rule Breaker once. Now, it's just broke.
You've just read my rebuttal. Read the rest of the duel here: