Mel Karmazin Speaks at the Liberty Media Corporation’s 2009 Investors’ Meeting

By Relmor Demitrius

Sirius XM Radio CEO Mel Karmazin spoke on October 16^th at the Liberty Media Corporation Investors’ Meeting. Sirius XM Radio is 40% owned by the Liberty Capital(LCAPA) part of Liberty Media, and according to Greg Maffei, CEO of Liberty Media Corp., is the “anchor” and part of the “core” of Liberty Capital. With such well known entities in LCAPA as Starz Media, stakes in Viacom, Motorola, Sprint Nextel, and Time/Warner, this is no minor acquisition or after thought of the media giant. It was not surprising then that Mel Karmazin was asked to present and speak at this meeting. Starz Media also spoke during the Liberty Capital presentation part. Presentations were also made during the meeting in regards to Liberty’s other two holding companies, Liberty Interactive, and Liberty Entertainment.

Before Mel presented, Greg Maffei talked about opening Sirius XM to other markets and venues. Some of these expansions would be “strategic” in nature. He said that Liberty will work hard to monetize their investment in Sirius XM.

Mel Karmazin, after being introduced by Greg Maffei, had some insightful and never heard before comments about certain issues involving the company, and its bumpy last year.

Here are some of the highlights Mel Karmazin discussed in this meeting. He offered investors insight into the business model and talked of events and plans never before talked about in a public forum. Sirius XM investors definitely learned some insight into managements thinking from the time of the merger, the February debt problems, and their plans for the future.

One of the first issues Mel addressed was their problems clearing their debt in 2009. In February, as all Sirius XM investors know, Sirius XM was in a dilemma; too much debt due, too quickly. They needed assistance, and Mel said many companies came “out of the woodwork” to help. Most however, did not offer plans that included saving the common, or were good for stockholders. They would save the company, but not the stock. Mel said he was unwilling to do that, and looked for a partner to help them without losing all stockholder value. That partner became Liberty Media, and Mel was able to save 60% of the value of the company for current stockholders.

Mel mentioned that they have no plans for a reverse split today. He seemed confident it was not necessary, and judging by his tone and context, might not be necessary in the future either.

One of the more exciting and promising ideas he mentioned was to turn on all dead radios, and enact an advertisement based model for these radios. Offer a teaser amount of content, and try to entice listeners to sign up for the full pay service. Mel seemed to talk of this idea as very conceivably executed, and didn’t mention any potential problems it might incur. From speaking with many investors of this equity, I know that there is a great deal of confusion whether the FCC would allow this. Apparently Mel isn’t too worried about it.

Another debated issue with Sirius XM, is related to the costs of their satellites, and just exactly what had been paid, and what hasn’t been paid. According to Mel, Sirius5 is paid for, as well as XM5. Sirius6 still has costs, but after 2011 no more CAPEX on satellites. This will pay huge dividends on the balance sheet come Q3 and Q4 of 2009. He stated there were some launch costs, and insurance costs still associated with XM5.

Mel said that Sirius XM has “no liquidity issues”, and hopes talks of this are “history”. He sounded almost annoyed here. For the bashing this company has received this past year, I don’t blame him for feeling this way. There liquidity issue hasn’t been a concern since February, and I think Mel is tired of hearing the same ignorant questions from the media.

The used car market is a target for Sirius XM, and adding cheap subscriptions in the market is important to them. Mel stated that CarMax cars had a satellite radio in them 22% of the time. This is obviously no cost to acquire this sub, so it is a huge advantage to access this market. Sirius XM has many used car deals to take advantage of the used car market. He even mentioned getting involved with insurance companies, so the company can even know when a car has been sold, from person to person.

The presentation turned to the subject of Sirius XM Radio’s competition. Mel Karmazin was happy to be competing directly with terrestrial radio, citing how strong their growth and earnings were compared to the top terrestrial radio companies. He said that terrestrial radio is doing all they can to retain their listeners, instead of growing their companies, or adding content. Mel stated that Liberty investors should be very happy to know that the competition is terrestrial radio. Mel said competing against these guys is a nice opportunity for us.

He commented on the “extraordinary” cost reductions the merger has allowed, and the added revenue best of, internet charge, and royalty fees has provided.

Some of the merger synergies have yet to be realized, Mel discussed. When competing with XM, Sirius and XM both drove up contract costs, talent costs, and OEM deal costs. Now one company, these deals will now become “market valued” deals, instead of artificially priced deals due to two competing parties vying for the same services. In this regards, is the true value of the merger, and it’s still in the future. Also consolidating to one delivery system would be the other. Expect all OEM contracts done pre merger to be reworked, and more favorable for Sirius XM, as well as all content contracts that were fought over by the two companies. Mel did mention details of the Howard Stern contract negotiations, at this point in his discussion.

Mel pointed out that the company was focused on subscriber growth. He also said, “FCF is what creates wealth for shareholders, enables you to buy back your stock, pay down your debt, make acquisitions, so FCF is still the mantra for us.”

Mel sees OVER 400 million in EBITDA for this year.

After hearing these comments from Mel, as an investor, I can see a clearer picture, and get some insight into what the Q3 Conference Call might hold. The future seems bright for Sirius XM, and it’s good to know that Mel is concerned with shareholder value, and is making the correct decisions to grow the company successfully. As Greg Maffei has stated, I need to “stay out of the way” and let Sirius XM run its business.

Disclosure: Long SIRI