Borrowing billions of dollars to try to build a business from
scratch is always a bad idea. Companies tend to under-estimate
expenses and over-estimate revenues in order to sell stock and debt
at attractive rates. When investors and lenders get wise, they tend
to stop putting fresh money into the business, often when it is
only half built.
That was the ignominious fate suffered by Sirius Satellite Radio,
which was forced to merge with rival XM Radio back in 2007. That
effort simply combined two money-losing entities into one larger
money losing entity known as
Sirius XM Radio (Nasdaq:
As a quick refresher, Sirius generates the bulk of its new
customers by offering limited free-trails to buyers of new cars.
The company is also aggressively pursuing the used car market these
days. According to the Department of Transportation, there were
more than 250 million passenger vehicles on the road in the United
States in 2007. Sirius estimates that 27 million of those vehicles
have factory-installed satellite radios. About 11.6 million of
those vehicles have active subscribers at the wheel, with 15.3
million that are active radios but are not enabled.
Sirius believes that within five years, the number of vehicles on
the road with factory-installed satellite radios will grow from 27
million to about 70 million, depending on auto sales trends during
A year into the merger, Sirius XM subscribers were beginning to
defect and debt-holders were threatening to take control and wipe
out equity investors. By January 2009, shares fell all the way to
$0.11, which usually implies an imminent bankruptcy filing. Indeed,
a $175 million
repayment was coming due in February 2009, but suddenly against all
odds, things started to turn around. Uber-investor John Malone
showed up with a $400 million rescue package to help beat back
creditors. Within a few months, auto sales rebounded and
subscriptions started to spring back to life. (Sirius generates new
customers by offering them satellite radio in new cars).
Despite the boost, the company's customer base was still shrinking.
It lost nearly 600,000 net subscribers in the fourth quarter of
2008 and another 400,000 in the first quarter of 2009. By the
second quarter of last year, it lost another 200,000 subscribers.
Subscribers were still leaving, but the trend appeared to be
Finally, by the third quarter of 2009, Sirius changed course and
added more than 100,000 subscribers. During the next six months,
530,000 net subscribers signed on. Just this morning, Sirius XM
announced that it signed up 583,000 net new customers -- more than
twice analysts' forecasts and more than twice the rate seen in the
prior two quarters. That helped push shares up +5% in Wednesday
So is it safe to jump back into the water with this one-time
highflyer? Yes -- with a caveat. The ride ahead will be bumpy as
investors try to assess how and when Sirius can tackle it's
, which tops $3 billion.
The company faces no major repayments before 2011, at which time it
will need to come up with $340 million (roughly the current amount
of cash on hand), or find a way to roll over that debt. Another
$200 million comes due in 2012, but an eye-popping $1.8 billion
debt burden will need to be addressed in 2013. The sharply improved
subscriber numbers will surely help. Now that Sirius looks healthy
once again, it could look to replace that debt with longer
maturities at lower interest rates. And the operating outlook
should only improve further as the company moves closer to those
As new cars sales continue to rebound up off of their lows, and as
the installed base of used cars with installed satellite radios
grows, Sirius' subscriber numbers should keep improving. Because
this is a high fixed-cost
, incremental new revenue should fall quickly to the
There are two other factors worth noting: First, a five-year $500
million deal with Howard Stern expires at the end of this year, and
a similar deal with NASCAR ends next year. Revenue and expenses
will likely be altered by the outcome of any negotiations with
those two entities.
Second, Sirius lost so much money in the last decade that it now
has approximately $8 billion in state and Federal Net Operating
) carry-forwards. Those NOLs could be a substantial asset for any
potential suitor that may look to acquire Sirius and shield its own
profits from taxes.
Action to Take -->
Sirius is clearly far healthier than 18 months ago. When the auto
market eventually rebounds, growth should be sure and steady.
The improved outlook should enable smoother management of the
company's substantial debt load. Look for analysts to upwardly
revise their forecasts after today's subscriber news. Shares trade
for about 10 times likely upwardly revised 2011
targets. It's unlikely that shares will garner a multiple much
beyond 13 or 14, at least while that debt overhang is there, but
+30% to +40% upside from here looks attainable.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. Most recently, he served as Managing Editor of
RealMoney.com, the premium website of TheStreet.com. David has made
numerous media appearances over the years, primarily on CNBC and
Bloomberg TV, and has a master's degree in management from Georgia
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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