Howard Stern is worth every penny. That's my first point, and it will be my final point, too. I say this because some satellite-radio investors are a little hesitant after Sirius Satellite Radio
Stern has earned the stock. It was part of his $500 million five-year deal, and that $110 million chunk of stock that's now worth $210 million is his for the cashing. Stern is receiving the stock portion early because the company surpassed the subscriber target that would have triggered the release.
This doesn't mean the shares were dumped yesterday. Nor does it mean that the stock will be sold tomorrow. If a sale happens, it's likely to be in manageable lots. Not that it would upset the balance of things, given that Sirius trades an average of 75 million shares a day.
The concerns are legitimate, though. Sirius has a huge amount of shares outstanding -- 1.3 billion common shares and another 501 million that the company has reserved for issuance related to its convertible debt, warrants, and employee stock options. Putting another $210 million worth of stock in the public float -- if Sirius were to sell the entire position in the open market -- is certainly not ideal, though it may help stave off some volatility in the future. But until that happens, the uncertainty will hang around like a pesky houseguest who won't take the hint to leave.
What if there were no Howard?
Sirius investors should probably be grateful that these shares exist. Where do you think Sirius shares would be sans Howard? That's something worth contemplating, because if you don't think Stern is worth every penny -- and share -- that Sirius invested in him, it's easy to go back in time and silence the naysayers.
The day that Stern's signing was announced, Sirius shares leapt so high that the company tacked on $1 billion in market cap. Even with the recent weakness, the stock has added $3 billion more in market cap. How much of that is related to Stern? A lot more than you may think.
Shares of rival XM Satellite Radio
Not that Sirius has shown the greater fundamental spurts along the way. Let's take a look at some of the numbers:
| 10/5/04-1/11/06 | XM | Sirius |
|---|---|---|
| Share price gain | 0.1% | 82.7% |
| New subscribers | 3.5 million | 2.6 million |
| Monthly rate increase | 30% | 0% |
| Channels added | 30 | 5 |
If I have to take Stern to task, it's that during his press conference on Monday and Larry King's show over the weekend, he made it seem as if the migration of his fans was single-handedly responsible for Sirius' net subscriber base growing from 662,289 members the week before he signed on to 3.3 million at the end of last month.
Not so fast there, Howard. I know I went with a Sirius subscription in 2004 because of the Stern factor, but how do we explain that since Howard inked his deal with Sirius, more consumers still opted for XM? The tide changed this past quarter, with Sirius winning its first quarter against XM, but most of the gains until now were just the natural progression of 6.1 million more terrestrial-radio listeners getting fed up with ad-laden music channels, thin playlists, and a lack of variety, and going the satellite route.
I'll give you $2.50 for the Wack Pack
One can argue that if Stern weren't in the picture, XM had the improved fundamentals over the past 15 months. XM added more subscribers and more channels, and it was even able to raise its subscription price from $9.99 to $12.95 a month. You also have some pretty tempting partnerships on the XM side. It has teamed up with Napster
Put in that context, perhaps Stern is worth even more than the $4 billion appreciation gap that's opened between the two companies since Oct. 5, 2004. At the very least, he is worth every penny of that original $500 million deal, which is now more like a $390 million cash/$210 million stock deal.
That's why XM was recommended to subscribers of the Rule Breakers ultimate growth newsletter service back in the fall. It was my call. As much as I love my Sirius subscription and can appreciate that the whole world is underestimating the true potential of satellite radio -- and both of its players -- XM just offers the better value as an investment at the moment.
If I'm right about satellite radio, investors are going to love the landscape by the time Stern wraps up his contract with Sirius in 2011. The subscriber base of both companies will be well into eight digits, while their market caps are likely to creep into 11 figures. Prices will have inched higher than $12.95 a month, just as your satellite television and cable TV bills have over the years. Subscribers will be buying premium content and ordering everything from digital downloads to sponsored products as well. Satellite radio will become an indispensable appliance.
Yes, the valuations appear lofty to those worried about red ink and liberal stock issuances. In the long run it may all seem petty, like $500 million for Stern. In retrospect, though, he will be worth every penny. All 50 billion of them. And counting.
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Longtime Fool contributor Rick Munarriz is a Sirius subscriber, but he does not own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
