I'm Still Bearish on Sirius XM

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:

Akamai is a Rule Breakers recommendation. Try this Foolish service free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers owned shares of Akamai at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy prefers streaming most during its fly fishing vacations.


Read/Post Comments (11) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2009, at 3:22 PM, geoslv wrote:

    I wasn't aware of the stock dilution element, and it's not something I'm informed on. But now Liberty will not allow Sirius to fail. It's going to be Liberty's baby.

    I still can't see internet radio. It's obscure and limited. I can see Stern retiring but not going on internet.

    How can you beat instant access everywhere to a satellite transmitter?

    There's Obama stretching to bring Cable to all parts of US territory. In 5-10 years it'll be some new technology and it'll start all over.

    The Federal Reserve knows the difference between supplying money when there's deflation, versus oversupplying and creating inflation.

  • Report this Comment On April 06, 2009, at 3:29 PM, McNabRanch wrote:

    Satellites doomed??? Wish you had a EE and 35 yrs RF experience like I do.....then you'd know it doesn't matter much what kind of ckt boards your two companys are inventing......propagation, sonny boy, propagation.....ever seen a 50/75KW water cooled am/fm xmtr with claimed 60-70% efficiency...hah!.....bet even NAB has quit buying them...mostly from GE, btw....

  • Report this Comment On April 06, 2009, at 3:32 PM, Fredlee009 wrote:

    And I see your still ignorant then.

    The debt is priced in. Sorry to inform you. Why its only .35 cents. Dilution is priced in, when I factor their market cap, I already assume the Liberty deal, as does every real analyst on the planet. They are still projecting higher price targets. Now the debt. They only need to keep their current subs(yes I didnt stutter, you heard me right) and they are positive EBITA right there. Add more and its gravy. Add more cost savings from the merger, no more XM writedowns(you saw the last one last report), they received cash from MLB escrow account, signing talent WILL NEVER COST MORE THAN TODAY, and dwindlling advertising revenue from terrestrial radio, and the 30 million new possible subs instantly(iphone app, ipod), add deeper penetration rates in car installs, add the worst car sales in the modern era(only go up now), and you will see why that debt is only a hinderance to higher profit levels, not a problem to be paid off in installments as required. Not to mention an extremely nice debtor for once(a debtor who has more interest in it suceeding than failing), and you will know why you indeed write for the "fool", and talk to fools.

  • Report this Comment On April 07, 2009, at 2:58 AM, dstnewman wrote:

    Anyone who is invested in Sirius who does not know about the dilution must be watching too much Cramer. They announced the dilution fact, and the stock trippled. The stock price is priced in for dilution already, just like it was priced for bankruptcy before.

    As far as EVERYTHING else you mentioned:

    You seem to ignore the fact that we are in one of the worst economic environments in years. The reason that Sirius had to borrow money at 15% interest was because NO ONE was lending money. The fact that they SUCCESSFULLY negotiated ANY loan to stave off bankruptcy should show how strong of a company they were and still are. Yes, there will be future refinancing necessary, but it will be done in a much friendlier economy.

    You mention tons of debt, but what you FAIL to mention is the fact that the company will be EBITDA positive for the full year 2009 according to their forecasts to the tune of "at least 300 million". You forget to mention that costs have been dropping nearly as fast as the Motley Fool's subscriber numbers, while revenues have increased significantly. You forget to mention that due to synergies with satellite CAPEX, they will be able to maintain half of the satellites as a single company.

    It is convienient that you leave out so much information that would hurt your case. Your entire argument is based on th future, yet you base all of your assumptions on todays environment.

    Newman

    http://www.SiriusBuzz.com

  • Report this Comment On April 07, 2009, at 7:13 AM, kingfrogcash wrote:

    Did you get paid to write the obvious?

    You provided nothing new.

    How many people listened to the Olympics streamed over the internet? How much money was generated? If there were not competition, SIRI and XM would not been allowed to merge.

    So far no one, and I mean no one including the Fool has put together an alternative revenue model (much less profitable) to compete with SIRI except broadcast. The only thing Stern could do, is record his 4 letter word shows and offer them on itunes.

  • Report this Comment On April 07, 2009, at 9:28 AM, TMFMileHigh wrote:

    'Morning all,

    Thanks for the comments.

    Much as I appreciate the passion, snippets like this are extremely dangerous:

    "The debt is priced in. Sorry to inform you. Why its only .35 cents. Dilution is priced in, when I factor their market cap, I already assume the Liberty deal, as does every real analyst on the planet. They are still projecting higher price targets."

    Fair enough. Let's dissect the math behind their assumptions.

    At 6 billion shares and a constant multiple (0.84 times sales per share), Sirius XM would have to produce $2.58 billion in revenue, a 55% improvement, in order to gain ... no ground whatsoever.

    Here are the formulas:

    1.66 bil. in current revenue / 3.86 bil. shares outstanding = $0.43 in revenue per share

    $0.36 per share stock price / $0.43 per share in revenue = 0.84 multiple to sales

    6 bil. shares outstanding x $0.43 per share = $2.58 bil. in assumed future revenue

    As you can imagine, the math gets a lot more trying once you assume a double or triple from here.

    There's little doubt that Sirius XM is an innovative company with excellent content, but it faces significant hurdles -- weak partners, a lousy credit market, oppressive debt, and emerging competition.

    There isn't enough goodness here to convince me that risks are being compensated.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On April 07, 2009, at 10:05 AM, ByrneShill wrote:

    I'm with you Tim. If all the 3.3 bilions of SIRI's debt end up financed at a 15% interest rate, it's gonna cost almost 500 milions in interest only. The debt alone could make Stern's contract look cheap.

  • Report this Comment On April 08, 2009, at 12:19 AM, dstnewman wrote:

    Tim:

    You are basing this whole dilution argument simply on revenue per share? What about future earnings? The fact that they will be Adjusted EBITDA positive for 2009 and beyond?

    You also failed to respond to any of my points. When a company like Bear Stearns, Lehman Bros., and Circuit City, et al cannot find financing to save them from bankruptcy, Sirius was able to pull a rabit out of their hat, regardless of the terms. That, my friend, is an incredible feat.

    You mention high insterest rates. While I know he does not represent you, Byrne Shill also talks about refinancing every penny of the 3.3 billion to 15%. There is no real debt due until 2011. Do you not think that we will be in a better economic period by then? Do you not think that Sirius showing positive growth AND earnings will not allow them to refinance a large portion of their debt for a LOT lower interest rate? 2014 debt is sitting at 14% already, and now this new debt at 15%. Much of this can be (and will be) refinanced when the economy has turned around for 7-10%, which will directly impact the bottom line.

    In your reply you mention: Weak partners, lousy credit market, oppressive debt, and emerging competition.

    Weak partners will turn around when the economy turns around. Even if they DONT, people will still buy cars, even if it is not from GM. Oh, BTW, since you see that as such a bad thing, GM is their most expensive OEM deal, and a GM failure is probably the best thing that could happen to SIRI.

    When the economy turns around, the credit market will no longer be lousy either. When the credit market is no longer lousy, their oppressive debt will be refinanced to be much more managable. In addition to that, they will be making PROFITS, which means they can pay off some of that debt.

    And I cant wait until the Recording Agency that deals with revenue share finally comes to a decision on royalty rates for internet radio. We will see how your precious competition stands up to SIRI then. Even Slacker has said that with an increase in rates, their business model is on shaky grounds, at best.

    In closing, you seem to view Sirius as if it is in a vacuum and that nothing is going to change. Granted, the stock is priced for those exact circumstances. Thats what makes SIRI such a great stock. It is priced for the current situation. The downside is minimal. The upside is great. It is a shame that Rick is the only one that sees this.

    - Newman

    http://www.SiriusBuzz.com

  • Report this Comment On April 09, 2009, at 11:09 PM, draland wrote:

    On 4/9/09, three days after TMF, and the crony; BShill, called SIRI's partner's 'weak'...........these same weak partner's get upgraded to BUY, vis-à-vis, their DEAL WITH SIRI................pretty good results for these insignificant partners, just because they associated their selves with loser Co. the likes of SIRIXM................................?? Doh!!

  • Report this Comment On April 16, 2009, at 8:22 PM, dambrokeagain wrote:

    I am a simpleton...constant claims of Stern accounting for between 2 and 4 million subscribers is not accurate. No one I know listens to satellite radio because of Stern. He is over rated. That being said...yall can begin my crucifixion now LOL

    Sirius XM would do well to tell the Oprahs and Sterns of the world that contracts would not be renewed. One person is NOT worth that much money. The money saved could be put over into the debt of XM. Keep the uninterrupted commercial free music and sports. This is what we really want. Stock will survive if these types (stern and oprah) are kicked to the curb. They aren't on the air 24 hours and Siri will move ahead better without em.

  • Report this Comment On April 28, 2009, at 2:36 PM, DiscoFinance wrote:

    Great point! This issue is exposed in a new movie (stockshockmovie.com). FYI: I used coupon code: FREESHIP for free shipping of the DVD.

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