Sirius XM’s True Value Yet To Come

By Relmor Demitrius

Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin is like a kid in a candy store these days.  He came to Sirius Satellite Radio in 2006 with the stated goal of combining the only 2 satellite radio companies, XM Satellite Radio was the other, into the vision its founder Martine Rothblatt envisioned in the first place:  One satellite radio company.  The FCC thought it knew better in the 90′s and awarded spectrum to two companies instead, even after insistence from Martine that it wouldn’t work with two companies. To him the concept simply only worked for one company, and 10 years later it turned out he was right.  With Sirius and XM both struggling to monetize billions invested due to competing costs associated with signing talent and OEM contracts, they finally merged into one company in July of 2008, after the longest merger delay in FCC history.  Regardless of the FCC’s attempts to sabotage these companies from day 1, Mel finally has his wish.  A combined satellite media giant to control and run with the efficiency it was always intended. 

Synergies from advertising to administration have allowed Sirius XM to shave millions in day to day operating expenses.  Is this why Mel was so jazzed about combining these two companies?  Hardly.  Here is a look at why Mel wakes up happy these days.

1.  No one can pay Howard Stern what Sirius XM can, and there is no XM this time to drive up his ridiculous salary of 100 million dollars a year, minus the cost to run his 2 stations.  So Howard’s only play left?  Fake like he’s tired and wants to retire.  Nice play Howard, and good try.  But everyone knows your full of it.  You are as likely to retire as Oprah giving back the 50 million dollars she basically didn’t return to Sirius XM in fair value back.

2. Rosie O’Donnell actually cares about her commitments.  The new female/alternative lifestyle liaison extraordinaire is off to a nice start.  Adding in a TV show where she will promote her radio show is going to be great exposure to the product and drive in subscribers, something Oprah was unwilling to do.  Howard Stern recently suggested on his radio show that Oprah stole money from Sirius XM, of course not literally, and I agree 100 percent.  Just not having to send a check anymore to Oprah gives Mel a little bounce in his steps these days.  It is not only the money Mel doesn’t have to pay Oprah now, its the real talent he can now acquire with the same money.

3. The real synergies are yet to come.  The ones so far have been cute, and affected the bottom line immediately.  The reasons Martine knew what the FCC failed to figure out, is that 2 companies would not be able to provide the infrastructure cost, talent cost, and all other costs associated with the service and become profitable anytime soon.  This is about to be corrected.

All contacts Sirius XM currently has are bad deals.  They are all bloated overpaid contracts simply due to having to compete with another satellite radio company.  The bottom line NEVER supported these deals, and were done by CEO’s desperate for short term gains in subscribers, and to be the company that would be in best position to survive.  I don’t think either CEO actually felt like these were deals that worked with their business model at the time.  Keep in mind that most contracts involved with Sirius XM were not negotiated with Mel Karmazin in control.

When the NFL, NHL, NASCAR, NBA, and MLB come to the tables again to discuss their new deal, Mel is going to have a surprise for them.  A take it or leave it offer.  He will now be able to state with intelligence and knowledge what these products are worth to them.  If these entities don’t like the offer, then they lose this revenue stream.  There is no other way to make it back, and they will not turn down free money for offering basically nothing in return, at least in their point of view.  If anything it’s great exposure to the sport.  It will still be a very wealthy contract for these entities and Sirius XM will save over 100 million dollars total on these above contract renewals.

Ford, GM already, Chrysler, Toyota, and all major car manufacturers are going to come to the table next time with one offer, not two.  You cut your offers in half and you will see the results.  These results would be more favorable terms for Sirius XM’s bottom line, and hopefully huge upfront costs associated with acquiring new subscribers will be lowered dramatically.  As Sirius XM does not allow competitive knowledge of their OEM deals, we don’t know exactly where and how these savings might occur, just that they are sure to occur.

4.  One spectrum.  Imagine one radio that picks up both XM and Sirius signals.  Now imagine one satellite transmitting both signals.  These are not pipe dreams, but actually stated goals from Liberty Media CEO Greg Maffei, which controls a 40% stake in Sirius XM through its Liberty Capital tracking stock (NASDAQ:LCAPA).  He stated in late 2009 that he was excited that Sirius XM will one day be consolidating their spectrum and service, and freeing up huge amounts of spectrum for other services, possibly mobile TV, or simply leasing out its bandwidth to other entities willing to pay billions for its use.  As the cell phone industry is discovering, Wi Fi and cell phone repeater towers are not the answer for mass internet streaming.  The problems are enormous, and current technology makes it impossible to get to where they want to go.  Not to mention the huge health risks associated with the service.  Do we really want more powerful frequencies ripping through our brains just so Johnny can download a movie to his cell phone faster?  Do we really want to endanger aircraft, see filings associated with WCS Coalition and the companies seeking to block this terrible deal for Americans, just so Mary can get a text message .0001 second faster?  Sorry folks.  You really weren’t meant to be able to download the new Black Eyed Peas song from the top of Mount Everest without satellite technology.  Not without giving your entire world population cancer in the process. Satellite technology is safe, more powerful, and 100 times more efficient.  Why the delay to go all satellite?  No vision.  Problems of today were unimaginable to the companies that went with cellular technology back then.  Sirius was smart enough early to realize the importance of satellite technology.  Keep in mind, the first cell phones were just becoming popular when Sirius and XM were getting off the ground.

5.  Global markets.  With recent acquisitions and comments from Liberty Media and Sirius XM, some type of global play seems to be well underway.  What advantages Sirius XM will receive from these ventures no one is sure as of yet.  However, with Liberty putting up the costs, it seems like some addition to their bottom line would be generated from this partnership.  With expansion into Mexico already slated, and service in Canada years in play already now, Mel has every reason to be excited about expansion possibilities into new markets.  Is Europe next?

These are just a few things Sirius XM investors and Mel look forward to in the 3 years ahead.  Until then the market will play their games and make you think you have a dud on your hands.  Long before these synergies are realized they will be priced in.  As of today, not one of them has even registered a hint of life to the stock price.  Is the market looking ahead with this company, or behind?  Seems like most investors and journalists  focus on a company’s future, but the journalists who cover this stock only see the past.  Ironic.  Because in the past these problems were foreseen and no shock to anyone associated with the two company concept.  One company was always the point, and now the FCC realized its mistake.  When will the market realize these basic concepts?  It had no trouble pumping the 8 billion in merger synergies before the merger, but yet can’t find a place to add 1 dollar of this value to the post merger price.  That’s ok.  Mel doesn’t miss any sleep at night over a myopic market that has completely missed the boat on his company.  One day soon Mel will say I told you so, and their doubters will wonder what happened.

Long SIRI