Mel and Howard

There are many ways to identify and define success.  The same can be said about worth and value.  It is especially true when trying to apply these concepts to something intangible, as an artist or performer.  Take a talent like Howard Stern.  He’s not a hard asset that you can simply attach a known value to, or state exactly what he would mean to your company.  What is his actual value to Sirius XM Radio (NASDAQ:SIRI)?  When Greg Maffei (CEO of Liberty Media and Liberty Capital (NASDAQ:LCAPA) and 40% owners of Sirius XM, ask Mel Karmazin (CEO of Sirius XM) how much is Howard Stern worth to the company, what does he tell him?  This is the debate among bloggers to professional financial analysis that has been going on for years.  How do you evaluate Howard Stern’s actual value to the company?  He makes 100 million dollars a year, minus the cost to run his show.  Is he worth it?  Is he overpaid?  Is he underpaid?  Is he fairly paid?  How much of Sirius XM’s revenue can be attributed to him.  In this article I will go over the effect of signing Howard Stern to Sirius Satellite Radio and any effect overall he had on the satellite radio industry altogether.  First, let’s get some opinions out of the way.

Howard Stern is an amazing talent and still the best radio on radio.  No offense to Michael Savage fans, Rush Limbaugh, Opie and Anthony, or Larry King.  Whatever.  There is still no bigger celebrity in radio.  Rush is close, but I don’t think he even can match Howard still to this day.  Howard’s popularity may be waning but he is still the best.  That being said, let us leave the personal opinions and feelings at the door.

Howard Stern announced in late 2004 his intentions to sign on with Sirius Satellite Radio.  We can use XM as a “placebo” or neutral study of sorts to gauge Howard’s affect, as XM was not able to land his services, yet offered an extremely comparable product.  Using subscriber data is one way we can determine what affect or advantage Sirius gained over XM by adding this particular radio personality.

Even though both companies were awarded licenses at the same time, one was bound to get the service started before the other.  XM began service in November of 2001.  Sirius began in July of 2002.  That is an eight month head start for XM.  Total subscriber numbers for Sirius at the time Howard Stern was announced in 2004 was around 800,000.  XM had around 2.5 million at the time.  However, XM had almost a year head start on launching their service.  This is the obvious reason for the big difference when both companies began service.  Also XM was considered to have better quality by samplers of both services.  Let’s attribute some of this as well to XM’s early success.  It proves also that content is important but so is quality of sound and the hardware too.  So if you remove 1 million subscribers due to XM having a year head start, we’ll use a base of 1.5 million subs for XM before Howard (assuming both companies began service on the same day) and 800,000 for Sirius before Howard.  Now let’s give XM a 1 million subscriber lead at this point, all things being equal.  Sirius has begun in the hole in subscriber totals.  Retail market is humming for XM and their product is well marketed and “first to market”.  This is always a huge advantage.  I think early deals with SONY helped give them another initial jump over Sirius at the time.  It might have then attributed some to initial consumers decision, but now that the majority of the exposure is tied to what type of car you buy, the impact has decreased dramatically over time.  Sirius radios have improved and the offerings are more similar.  The blending of content and availability of Best of Packages has further blended this difference as well.

In July 2002 both services were in play and could be purchased by consumers.  People now had a choice.  Sirius begins trying to go into more of the OEM growth side, while XM focused mainly initially on retail.  Although by the time of the merger both offered retail and many car options, they were both coming to the same conclusion: The OEM market (free trial at the initial new car purchase) was where it was at for huge subscriber growth.  XM realizing this too late and needing to make a splash in the OEM channel over paid for GM as a reaction to this realization.  Sirius at this point had already obtained the majority of the OEM contracts.  As a combined company they are now in every major car manufacturer on the planet.  This was well in motion before Stern signed.  In early 2004, Sirius and XM were in 22% of all vehicles sold in the United States.  In 2010 this percentage is now nearly 60%.  Stern signed right in the time frame that both Sirius and XM were experiencing significant subscriber growth due to shift to OEM growth.  Here is an interesting chart Sirius XM posted in May of 2009 at their shareholders meeting showing the shift from retail to OEM sales.  Why is this important to Howard Stern’s value?  Because we need to establish the exact scenario and timing in which subscriber totals in XM and Sirius jumped big starting in 2004 and were increasing in near proportion to Sirius, regardless of not having Howard Stern.

Clearly, retail growth was stalling even before the shift to OEM occurred.  Exposure was becoming an issue.  Relying on stores to move radios is risky.  You’re a slave to consumer traffic flow, location, and salespeople who may or may not know the product.  Also every satellite radio that was purchased had to be incorporated into an existing sound system and radio space that was available in each car.  Satellite radio had a solution for this.  Install the radio directly into the car, expose consumers to it at the time of new car purchase, and give it away as a free trial.  With exposure at the source of where you most listen to the radio and with cooperation from the OEM market, adding subscribers was now a bit less challenging, but more costly.  XM still had more retail sales and Sirius had slightly more auto sales, due to the lagging effect of the focus both companies took from day 1.  Sirius apparently had caught on to the better way of adding subscribers before XM had.  However, today XM has 10,057,380 subscribers.  Sirius has 9,470,068 subscribers.  Since 2002 this 1 million subscriber difference still hadn’t been made up. It is only 500,000 subscribers off, but clearly having Howard Stern did not seem to make it a large enough factor to cause one product over the other to be dramatically sought out.  Well wait one minute you say.  The merger gave consumers options now.  Maybe XM fans would flock to Best of Services or now switch due to the merger making the two more similar.

As part of its synergies of the merger, Sirius XM was excited to announce a Best of Package.  XM subscribers could now access the Best of Sirius programming as could Sirius subscribers now access the Best of XM.  For $4 more a month, an XM customer could keep his XM platform, but still grab Howard and other exclusive channels on Sirius.  How many people have signed up for this service in now over 1.5 year of offering it?  Less than one million subscribers of the 10 million XM has.  So around 1 in 11 people have chosen to add this package. We cannot however attribute all these subscribers to the Best of Sirius package on to Howard Stern alone.  It appears less than 500,000 people would qualify here. I’m giving approximately 500,000 to other reasons for adding the package.  I mean let’s look at what you get for $4 besides Stern.  You get every NFL game, NASCAR, Playboy Channel, Martha Stewart, and College Sports.  That’s a lot.  Not a stretch to assume then that every person who signed up for Best of Sirius wasn’t just doing it for Howard Stern.  There are a hundred reasons to get satellite radio in 2010 versus back in 2004.  The amount of content added since then is staggering.  I will not go into exactly what was added, but it includes Bloomberg Radio, Glen Beck, CNBC, NFL was not offered then, nor were many other sports packages.

How many Sirius subscribers bought best of XM?  Only around 300,000.  This is a huge difference and clearly shows that Howard Stern does have some fans over on XM, but apparently never big enough to cancel XM to go with Sirius.  Otherwise wouldn’t they have already cancelled and just went over to Sirius by now?  If the sub was from 2004 to now, they have had 6 years now to do so.  If owning XM and not having Stern was unacceptable, these subscribers had from 2005 to 2009 to cancel their XM sub and get a Sirius one instead.  Let’s assume using the facts that everyone on XM that wants to hear Howard, and everyone in the country who wants and now can listen to Howard has done so.  Its been 6 years since he signed, and 5 years now of being on the air.  The merger took place 2 years ago and the confusion of service is long over.  The value of new subscribers coming in at this point solely for Howard Stern is minimal.

So if XM is a case study of satellite radio demand versus exclusively Howard Stern demand, and we know that in 2004 a shift to OEM sales occurred, and Sirius has never been able to overtake XM in subscribers, what can we say about the effect Howard Stern has had on Sirius Satellite Radio?  The factual opinion is that while he must have added value to the product, their service was never able to distinguish itself significantly from XM’s and the Best of numbers offer a picture of how many people XM might have had that wanted Stern but bought “the wrong car”.   It also says that XM customers like their XM platforms so much, they would rather just add Best of Sirius than cancel their XM radio, remove it, and install one for Sirius.  Truly a die hard Stern fan would wouldn’t he?

So, 1 million subscribers paying an average of $11.80 each times 12 months.  That’s 141 million dollars a year attributed to Howard Stern.  Now add 5% of every XM subscriber, maximum, who wants to pay $4 for only Howard Stern.  Once again being generous, let’s attribute 100% of all these Best of customers to Howard.  That’s another 24 million dollars a year.  I’m going to add another 20 million in simple exposure (brand awareness, mentions on TV, magazines, etc..) and another 20 million for unique advertisers attached to Howard per year.  That’s a hefty 25% or more of their yearly total of all ad dollars.  More than generous.  Howard makes 100 million dollars a year, minus the cost to run his show.  He clearly generates more income than Sirius has to pay him.  How many subscribers would cancel the service if Howard left?  Maybe 500,000 of the 1 million.  Maybe half of the Best of Sirius customers cancel as well.  Lets assume over time you get fewer Best of Sirius users now.  Will his replacement add back advertising revenue?  Who would they pay to replace him?  Obviously they would make some of this back.  It not as if a black hole would open up where he talked and become irreplaceable no matter the money spent.  But it is good to get a worst case scenario look.

Howard maybe responsible for around 120 million in revenue over what they pay him. That’s from a total of 2.8 billion dollars in revenue a year.

Let us look at the Subscriber total chart from 2000 to end of 2006, 1 year into Howard broadcasting on Sirius.

Yes, there was indeed a small spike and increase in pace versus XM in late 2004.  But this increased cooled around the time XM and Sirius both started shifting into the OEM markets.  Notice the chart above and the time frame the OEM shift began.  Seems to be regardless of service, they were both popular and OEM customers told them so.  Today almost 50% of all subscribers given a free trial take the service.  This is XM or Sirius.

Did Howard improve the image of the company and make them more popular?  Probably true.  If he brought over 1 million subscribers, maximum number I can attribute to him that the facts I presented here support, then his salary is justified.  I can’t give him more because quite frankly, Sirius subscriber totals should be well over XM’s by now, if the talent he provides Sirius is so superior to anyone else that might be able to replace him for the same money.  If you were going to present Howard as a unique and vastly superior offering to anything XM pays for, then the subscriber totals would need to reflect that more.  Still trailing XM in total subscribers doesn’t help this camps case.

Conclusion. OEM sales exposed the product to many consumers.  They like XM just as much as they like Sirius, but some (less than 5%) are willing to pay for access to Howard, and probably only half of those 5% only for Howard.  Those that have XM haven’t made significant efforts to move over to Sirius, or cancel XM when their free trial ran out, and install a Sirius exclusive radio.  I believe by the facts presented here that Howard is well worth his salary and should be paid accordingly, as well as offering him on smart phone applications and any overseas content offerings.  But is he the end all savior of satellite radio?  Absolutely not.  Satellite radio would be here with or without him.  Company is stronger with him, but would survive just fine without him.  In fact, the cost difference is so minimal, it would be in tune to having a bad year, or a storm hitting your oil well that month.  A small hiccup that would easily be erased with time due to the overwhelming popularity of the product itself and the now vast options of content offered by both companies.  The revenue generated and saving of the 100 million of his contract would simply give reason to spend it elsewhere, and sign other talent to compensate.  Like any company that losses an asset and has to repurchase another one.  Howard’s popularity is no longer so huge that him leaving the platform would harm it in any way medium or long term.  The facts are quite clear on this.  Sirius XM added more than 1 million customers this year alone.  That would offset losing Howard Stern right there.  Their growth would probably cover any cancellations and they wouldn’t miss a beat.  The company that hired Stern 5 years ago is vastly different in 2010.

In my next article on Howard Stern, I will discuss the future with or without him.

For up to date financial news, fundamental/technical analysis on all trades and investments, visit www.kingofalltrades.com.

Disclosure:  Long SIRI

In the weeks since the final bankruptcy sale and approval of Worldspace assets to Noah Samara; this time through Yazmi LLC, one thing is abundantly clear.  The plight of all the assets of Worldspace and SATCO is as yet unknown and still awaiting a final outcome.  Court documents prior to final sale stated that the consideration to be received from Yazmi in the sale purchase agreement would not be sufficient to pay Liberty Satellite Radio and Liberty Satellite Radio Holdings in full.  The Debtors estimated that Liberty’s aggregate secured claims were in excess of $116 million dollars.  Under the settlement agreement, the Debtors were released from such claims and the corresponding liens, allowing the Debtors to distribute the proceeds of the sale to other creditors.  In exchange for that, the Debtors and the other Parties to the settlement agreement provided releases to Liberty, and Liberty received other consideration.  That “other consideration” was Liberty obtaining a return of $370,000 in funds which the debtors transferred to Liberty; that Liberty had loaned to support the WorldSpace Italia subsidiary.  When Liberty decided not to pursue a Liberty purchase agreement, the need for those funds evaporated. Liberty also received $250,000 of the Yazmi sale proceeds, which was 5% of the total and significantly less than Liberty would have gotten if its senior secured claims were still in effect.  The Debtors believe that the note from WorldSpace Italia that Liberty received is of little value; the Debtors also believe WorldSpace Italia cannot repay that note, and the Debtors themselves have limited resources with which to possibly pursue collection.  The Debtors were willing to relinquish their right to abandon their responsibilities and their assets to Liberty in exchange for Liberty’s relinquishment of much of its claim.  Why was Liberty so willing on paper, to abandon its senior claimholder status?

Liberty also wound up after closing of the Bankruptcy sale deal with a lien of $5.5 million dollars; which just happens to match the very amount Noah Samara paid for the Worldspace assets thru Yazmi LLC.  Liberty, along with all the other parties involved, is barred from suing Samara’s new business Yazmi LLC. as part of the Bankruptcy sale agreement.  Another interesting couple of points are; the fact that for the Bankruptcy sale to close, SATCO had to file for chapter 11 Bankruptcy; and the fact that there were no provision in the sale agreement for the sale or handover of the ground spare and or unfinished satellite which are both in storage.

Worldspace Bankruptcy sale order:

http://www.kccllc.net/documents/0812412/0812412100602000000000006.pdf

Yazmi received the orbiting Afristar and Asiastar assets which were transferred with final approval on July 29^th 2010 from Afrispace Incorporated.  As of today, there are no other filings regarding the former Worldspace satellites from Yazmi LLC

It appears that the final dissolution of Worldspace and all its intertwined assets is nearer, but still under a cloud of mystery and disinformation. The bankruptcy process has been streamlined a bit more so as to not convolute the situation, but final disposition of all assets seems to be in a state of flux.  Speculatively, there seems to be a back room situation with regard to Liberty and Yazmi. How else to explain the lien for 5.5 million which Liberty now holds from the bankruptcy sale; which again, is the same exact figure that Noah Samara paid for the Worldspace assets in the bankruptcy sale?  Why would Liberty take such a small sum and step aside when they were the major DIP lien holder?  Why would they agree to take the Worldspace Italia debt, uncollectible debt according to documents, as part of their settlement agreement?

As I continue to investigate the situation, and review documentation, it seems quite possible that some assets which Worldspace had are in Liberty’s sights.  However, in the multi-corporation tree that was Worldspace, streamlining of the ownership of those assets must take place before Liberty can have a solid and real chance at unencumbered ownership of whatever it is they see as valuable to them.  Once again, we know that Liberty has a large presence in Europe through Liberty Global.  Liberty Global’s European operations are conducted through Liberty Global Europe, which provides video, broadband internet, and voice services in 11 European countries under the brands UPC, Unitymedia (Germany), Cablecom (Switzerland) and Telenet (Belgium), and digital programming & services through Chellomedia, a world class multimedia content provider.

Liberty Global’s European headquarters is located in Amsterdam and home to their technological development, network management, and product development teams.  It is also the location of Liberty Global’s European distribution center, the Digital Media Centre (DMC). The DMC is the source of digital television for millions of households in Europe, in and outside of Liberty Global’s footprint.  In each of Liberty Global’s European markets, local affiliate operations benefit from the company’s global scale and centralized technology procurement, combined with its commitment to locally managed culture and content environments. Looking at this last sentence again, one could see where Sirius XM Radio (NASDAQ:SIRI) and Liberty Media might possibly benefit down the road should expansion into Europe be in the cards, or even to South America, as Liberty Global also has a presence there. One indisputable fact remains that Worldspace had licensing for L-band spectrum in Italy and Germany, those licenses are most likely the real source of Liberty’s interest.  Another interesting thing, and one which I feel is a part of the big picture is Liberty Global’s recent news announcing development of a home media gateway, as seen here:

Liberty Global partners up for IP multimedia home gateway

Liberty Global has announced plans to work with Samsung, Intel Corporation, NDS and Nagravision to build a new common IP gateway device for its European digital TV customers.  The multimedia home gateway will be an all-IP platform capable of distributing video, voice and data content throughout the home and to multiple video displays.  The user interface will seamlessly integrate video content, widgets, apps, and an advanced search and recommendation engine.

Samsung will build the multimedia home gateway, which will be powered by the Intel Atom CE Media Processor.  The middleware and the user experience will be provided by NDS, based on Flash Technology.  Nagravision will provide the conditional access solution through NAGRA Media Access.  This solution will support MoCA and WiFi, and participate in the Digital Living Network Alliance (DLNA) ecosystem.

Based solely on this information as anyone can see, the true potential for Sirius XM and Liberty has barely even begun to be explored.  There is much more going on behind closed doors than most of us are ever privy to.  With that in mind, and with Sirius XM’s recent quarters of solid improvement, the future of the company truly has never been so bright.  There is obviously still much to be done within the company, and much to be seen as things continue to sort themselves out, but those who bet on the demise of Sirius XM have surely lost to this point because the company is clearly focused on mitigation of the issues it had with respect to infrastructure and exorbitant costs of maintaining that infrastructure.  As satellite technology and capacity continues to evolve, the benefits to Sirius XM will clearly be evident.  The launch of Sirius FM-6 satellite will begin to bear fruit with regard to infrastructure cost reductions as synergies start to be gained and realized from Geostationary Orbit Satellites (GSOs) on the Sirius side join the already GSO satellites from the XM side of the company.  The movement from Non geo stationary  infrastructure will mean a significantly smaller footprint (less satellites in the air, which translates to less costs and CAPEX) going forward and required for the future infrastructure.  The teaser given last Sirius XM conference call regarding the SIRI 2.0 roll out is only a small glimpse into what the future holds.  A further enhanced internet presence would seem to be in the cards for Sirius XM as well.  Sirius XM  made a very conscious decision and made it an important part of its business plan when they created cell phone applications for the internet version of the service on every major cell phone platform.  The company now needs to be working towards improving the internet capabilities (more available channels) of the service as well as working toward the release of SXM 2.0. This will help solidify the companys’ position as the premier satellite and internet music and entertainment provider in the world.

Disclosure: Long SIRI

Greg Maffei

Sirius XM Radio (NASDAQ:SIRI) is offered many opinions of what their shares are actually worth.  It just depends on who you listen too.  There seems to be a vastly different view of just how much one should pay for this equity and ultimately what is their appropriate market cap.  If readers know my style, they know I do not work with subjectives or opinions.  I like cold hard facts when I tackle a problem.  The pulse of the investor community seems to be right now on trying to understand how an equity so obviously undervalued is still priced at $1 a share.  What is Sirius XM’s real fair value?  Well why waste a second longer, let us begin.

Without boring anyone on just how dangerous it is to attempt to use the stock market current price at any one time to try to determine actual retail sale value of a company and hence what one share is actually worth in reality (meaning if every share were to be purchased at one time, at what price could they buy the company) might offer a little insight.  Here is a good example of this from 2008.

When Microsoft (NASDAQ:MSFT) in 2008 offered $34 a share for Yahoo Inc. (NASDAQ:YHOO), the current range of the stock at the time was around $30 to $20 a share.  Why then offer $34?  Seeing the end result of the fiasco one already knows the answer to that.  The offer wasn’t even accepted.  Jerry Yang knew his company was worth more than what it traded.  Microsoft knew this as well, obviously.  They knew the stock was trading at $20 a share. So technically the stock market on that day is valuing Yahoo, Inc. at $18 a share.  That is in the end what Microsoft would have to pay to acquire Yahoo.  Its called a tender offer.  A broad offer to all stockholders.  This is a great example of where a stock is trading and its reality.  After Microsoft announced the tender offer, Yahoo, Inc. stock skyrocketed.  Someone huge and respected, Microsoft, saw the company as grossly undervalued.  If all shares held are worth $34 a share then that’s where the price would immediately go.  It usually trades just under the offer or as strongly to the offer as seemed reasonable the validity of the offer being accepted.  Upon immediate approval of the tender offer for the company the stock would go directly to $34 and probably trade within 1% of that price until the actual deed (then the stock would cease trading).  Anyone holding shares upon that day would receive the tender offer price.  This is but one of thousands of examples of a tender offer moving a stocks price up significantly from where it was currently trading.  Regardless of Microsoft later pulling the bid when they saw trouble in the markets, for over a months time they valued it still much higher than it would have been trading otherwise.

With this in mind, lets make a logical case for what Sirius XM’s true sale value is at the moment.  What would AT&T for instance offer Mel Karmazin(CEO of Sirius XM Radio) for the entire company?  Liberty Media (NASDAQ:LINTA) owns 40% of the company, would obviously have a say in this as well.  It would come down to a board vote, with Mel Karmazin’s opinion as well as Greg Maffei (CEO of Liberty Media) mattering the most.  Liberty Capital (NASDAQ:LCAPA) is the tracking stock in which the 40% Sirius XM holding can be found.  If representatives of AT&T contacted these 2 CEO’s of interest, what would he offer them to get a yes vote?  What method of evaluation would he use?

Notice no where in my above example with AT&T did I mention the current trading price of Sirius XM Radio.  Why?  Because to a buyer it’s not really relevant.  It is useful and I’m sure they would look at it, but I don’t know if they would even risk insulting Maffei and Karmazin with an offer for market value.  That might just get you hung up on and the line blocked from that number for future use.  Why would I say that?  Isn’t $1 a fair price for Sirius XM?  Doesn’t J.P. Morgan have a $1.05 price target on the stock?  So there is at least one supposedly honest reputable opinion out there on their value near current trading value.  Well careful whose opinion you believe.  S&P, which doesn’t sell Sirius XM  debt, has a $1.50 price target on it, other analysts have more, some less.  In the end these are all just 1 year price targets and not really even in that capacity reflecting in true sale value.  There are still useful evaluation methods used here we can draw from.  Let’s use a few methods from S&P’s Sirius XM analyst Tuna Amobi.  He uses EBITDA as a base evaluation method with an 18 times multiplier.  This is the estimated value of the subscriber base.  There are other areas of value that need to be mentioned as well. 

There are 8 billion dollars in taxable write offs, called NOLs, that are as good as money as long as the company makes a profit and needs them.  These have an approximate value of over 3 billion dollars. Since Sirius XM is now profitable during the worst economic conditions in decades we will assume these will all eventually be used.  Since Liberty Media has mentioned the importance of the value of these before we can safely use them in any evaluation model.

Sirius XM has 3 billion in value from NOL’s.  This is the reason Liberty Media will not be adding to more than 50% before August of 2011.  They need to allow 3 years to pass to satisfy change of ownership rules regarding use of the NOL’s.  They would be damaged if Liberty Media upped their stack to 50% or more before then.  So if you ever hear this silly rumor, squash it immediately.  Liberty Media will not add more control before August of 2011.

Sirius XM’s bandwidth is listed as valued at 2 billion dollars.  I think this is grossly undervalued on their balance sheet.  But we will hold it here as that is all Sirius XM is listing it as.  I believe its worth closer to 6 billion or more.

Sirius XM is projecting year end EBITDA at $575 million.  Mel isn’t going to tell you but I will.  Remember Walter Mondale in the 1984 presidential election.  Reagan isn’t going to tell you he is going to raise taxes, but I will.  Mel isn’t going to tell you that his EBITDA guidance is way low, but I will.  I don’t mean off by $10 million, I mean off by over $100 million.  That’s correct, Sirius XM end year guidance on adjusted EBITDA is being under forecasted by around 20%.  If you use an 18 multiplier (heck Tuna Amobi, analyst for  one of the most respected rating agencies in the country  uses it) and using $700 million (my estimate) EBTIDA you get $1.93 EV.  Tuna is only using what Sirius XM has as their estimate for the year, which will be way off, and hence why his estimate is around $1.50 for that value.  He is assigning around $650 to $700 in value per subscriber.  So take $1.93 as value of the subscribers alone.  This is your core revenue stream value.  This accounts for no price increases which is coming in around 1 year now too.  This also accounts for no continued improvements in cost savings, ARPU, or increasing subscriber totals.  This is only for CURRENT subscriber totals, not even end of year projections.  This is low ball stuff here.  Sirius XM has stated themselves that revenue would grow by 20%.  So an 18 multiplier on a high growth company is not unusual.  EBITDA is a common method of evaluation as well.  Well hold on a second.  Did we forget something?  O yes…..

Sirius XM has 3.1 billion in long term debt, 150 million left in capital expenditures and probably 200 million in interest payments left to deal with before that debt would probably be removed.  So that’s 3.45 billion dollars of liability over operating income.  Sirius XM will have to come up with 3.45 billion in earned cash before any value can come to their common shares.  No problem.  They have 5 billion in value alone from their licenses and NOL’s and let’s give them 7 billion in synergies (more like 8 billion but let’s be nice to the shorts and not scare them too much, and go with 7).  I didn’t even mention the land they own, the repeaters they use, or the satellites launched and in the air.  Let’s assume all that stuff is tied directly to the use of satellite radio and has no transferable value.  Even though the end user of the company would enjoy the use of this network and need it to allow the company to function, let’s be demons here and still give it no value.  Why?  I don’t know, maybe I feel a little ornery today.  Who knows.  Maybe I feel like getting a little crazy.  So now that we have all the numbers and facts we need let’s attach a value someone like AT&T might use to formulate a price offer for the company.

$3 Billion NOL value.

$7 billion in yet realized synergies.

$2 Billion Licenses.

$12.6 billion in subscriber value(steady revenue)

Remove $3.45 billion in interest, long term debt, and capital expenditures.

That gives us a fair value currently of $21.15 billion.  Let’s of course use full dilution(6.5 billion shares), as we always do when being diligent and you get a fair share value of $3.25. (Edited from an error a commentor brought to my attention.  I also forgot to add in the synergies, so I was a little low on my first estimate.  I apologize.  Not 8 billion in NOL value, only 3 billion.

Sounds fair to me.  I would accept that offer tomorrow for my shares.  Probably not a penny less.  As I demonstrated the actual value of the company is probably a lot more than this.  Before the merger the combined companies were valued at 12 billion dollars combined and that was in far worse condition with much fewer subscribers, no royalty charges, and no reworked GM deal among a hundred other synergies and improvements not yet realized.

Maybe 500 million of the synergies maximum have been realized already, but that would still leave consolidation of spectrum, reworked OEM contracts (GM rework appears to be saving them around 7 million dollars a quarter, and that’s just one contract so far), reworked talent contracts,  combining use of one satellite system (all synergies mentioned by Maffei as goals) and many other synergies combining the companies will realize at one point in the future.  So

So why is Sirius XM currently valued at $1 right now?  Because everyday under 100 million shares of 3.9 billion of the float get traded around like pong until more and more people realize what we all do now, or someone actually attempts to purchase a large amount of shares or makes an offer for the company.  Until that happens these things take time.  You don’t go from wall street punch line, where you have bankruptcy rumors just 1 and a half years ago to wall street darling just one year later.  Perception of value is all that matters on any one day on wall street and right now there seems to be a massive misperception of value when dealing with this company.  Not saying the stock should jump to $3 tomorrow, of course not.  I know how the game works.  Institutions, market makers, and traders will have their say on when and how it gets there, but I have no doubt that that is exactly where this stock is heading. 

For financial news, fundamental/technical analysis, and forum discussions on all trades and investments, visit www.KingofallTrades.com.

Disclosure:  Long SIRI

One June 25th, this Friday, the Russell family of indexes will have its yearly reconstitution event.  This event adds and deletes companies on their Russell index’s and tracking funds. Sirius XM Radio (NASDAQ:SIRI) will be one such addition.  It is not 100% official, as the official list doesn’t come out until next Monday, but its about as sure a lock as you can get in this type of situation.  Sirius XM was listed as an addition on the first two lists released, one on June 11th and the other on June 18th.  This is good timing for a stock that has been in an uptrend now since 6/9/10.  The equity has been moving up into this planned buy. 

Russell reconstitution is usually a high volume event that can result in massive volatility of price movement on that day.  On Friday, over 200 million shares, maybe much more, must be purchased.  Last year the market dumped these Russell shares, now the company enjoys the benefit of the reverse of that scenario.  One of the best advantages of being added is these shares will now not trade anymore.  They are used for exposure, not to be traded around.  This is great news for Sirius XM investors as any reduction in the tradable float can help sustain price levels and reduce downside volatility.  I believe Sirius XM will be added to the Russell 1000, which is a list of the top 1000 companies, based mostly on market cap but not entirely, which would require even more stock to be purchased.  The more lists they are on, i.e. Russell 1000, Russell 3000, Global funds, mid cap funds, etc.. the more shares will need to become available.  It has been speculated as many as 500 million shares may be required.  But who’s going to sell them the shares?

With over 200 million shares short and prices rising, you could add that to the 300 to 500 million shares needed for the Russell rebalance, and you can see the potential for upside movement.  Will these shorts close?  A good portion of this short position is trapped under the $1 mark based on the time short interest began to increase.  The highest the majority of this short volume can be positioned is at 1.10/1.15 area.  Once again this is based on the time of the increases in short interest and the trading volume by price.  Timing, volume, everything suggests much lower.  Are these shorts dumb money?  Are they new bondholder hedges created when Sirius XM bonds exchanged owners?  I would buy Sirius XM bonds completely unhedged.  At these price levels on the equity, a hedge on a bond is a dumb play.  You can erase huge gains by having your hedge get so far out of balance with its intentions, the secure income of a bond can be an illusion of value.  I know that the Sirius XM bonds issued in the merger deal were hedged.  Sure, at over $2 a share.  With massive debt due in 2009.  Totally different animal now.

So back to my question.  Who’s going to sell them the shares?  Since 40% of the common isn’t available to be traded here, owned by Liberty Media through its Liberty Capital tracking stock (NASDAQ:SIRI), the large retail ownership level can be an interesting factor on just what price most of these shares get filled.  With 90% of the available float owned by retailers, it looks like the retail investor is going to have a lot to say in where these shares are found.  Market makers might not find them very agreeable to sell at these levels.  If institutions can’t be found that will sell under $1.20, this stock has potential to quickly move up and try to find enough retail sellers to fill these orders.  Normally the Russell rebalance isn’t a huge bonus, its nice sure, but not huge.  This has huge potential due to the large short interest and the high retail share ownership, as well as suppressed volume and price trading that has been occurring as of late.  With all these factors in play, it should be an interesting couple months for sure.  Will these gains hold?  Hopefully a new higher range will be established and the uptrend will continue.  Retraces seem to be the norm with this stock, but since March 2009, the norm is also a higher base over time.

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Disclosure:  Long SIRI

Today Sirius XM (NASDAQ:SIRI) CEO Mel Karmazin gave the company’s Q1 2010 results.  Among the metrics was a 1 cent positive earnings per share (EPS).  Karmazin also let it be known that as of last week’s numbers, Sirius XM had over 19 million subscribers already this year, with just a third of the 2^nd quarter complete.  The company is also among the top 8% of NASDAQ stocks based on Market Cap.  Mel also let shareholders know that delisting fears and the specter of a reverse split to satisfy those fears was over.  Sirius XM has also been able to pay off some debt; and reduce interest expense to a less than 9 % unsecured rate on the most recent debt re finance. The company, which struggled after the merger approval in 2008; and nearly went bankrupt in early 2009, continues to report an astounding turnaround quarter after quarter since obtaining a short term, though costly loan from Liberty Media and John Malone. The short term financing was costly in that it resulted in Liberty Media obtaining 40% of the company through the loan agreement. Sirius XM repaid all outstanding balances from that short term loan in a very timely fashion.

Unfortunately, no matter how good the news, Sirius XM continues to be attacked at every turn.  Several media participants have taken Mel Karmazin’s response to a question about Howard Stern’s contract this morning, in which he said to listen to Howard to find out the status of his contract negotiations and attempted to turn it negatively in the press.  Stern signed with Sirius for $500 million back in 2004.  However, it is a far more fiscally responsible climate he is negotiating in now since the merger of Sirius and XM two years ago; Sirius XM has already re negotiated several contracts at reduced cost, but that hasn’t stopped Stern from trying to leverage his popularity for the best position in negotiations; as he should.  Stern has said he was entertaining offers from both conventional radio and even television’s American Idol program earlier this year.  Stern has also repeatedly stated he could never return to terrestrial radio. In all likelihood, a deal retaining Sterns’ services will be achieved with Sirius XM before the final bell tolls on his current contract.

There is also an issue with wireless spectrum being played out with the FCC and the WCS coalition, who got to buy spectrum on the cheap because of the issues surrounding it with its close proximity to satellite radio spectrum.  These issues were a matter of record at the time the spectrum was auctioned, and were the very reason why the spectrum was sold so cheaply at auction, because there were very tough limitations to its development due to issues with satellite radio interference; but now apparently the owners of that spectrum want to change the rules to suit them, regardless of its impact on satellite radio and its subscribers.  Sirius XM has fought for its subscribers vigorously on this front, but a final decision is still pending. Automakers have also sided with Sirius XM on this issue.  What the FCC decides remains to be seen, but one would hope that they would uphold the limitations and conditions under which the spectrum was auctioned off at a minimum, and not permit the conditions to be altered now in a fashion which not only interferes with satellite radio, but will increase the value of precious and limited spectrum that was sold to the holders cheaply due to the limitations, and short change satellite radio subscribers.

All in all, 2010 has been a very eventful year so far for Sirius XM.  Having overcome possible delisting and a reverse split scenario; reached the 1 dollar mark and once again improved the bottom line.  The company is also poised for re entry into the Russell 3000 Index and has plans to launch a new more powerful satellites, one in Q3 this year, as well as another next year.  2010 continues to look good for Sirius XM with continued signs of financial improvement as well as the recovery of the Auto industry. Certainly, Sirius XM will benefit as long as those two situations remain on track.

Disclosure: Long SIRI