Breaking Views

Sirius, your days look numbered

The company looks valuable down the road, but a dollar tomorrow isn't worth much today.

By Robert Cyran, breakingviews.com
February 11, 2009: 9:50 AM ET

(breakingviews.com) -- One day Sirius XM Radio will be a great business. But it will take lots of time and plenty of capital to see the U.S. satellite radio broadcaster to the Promised Land.

Today it's on the brink of default. The company's not generating cash and needs to repay $175 million of debt in a week's time, plus another $750 million later in the year.

No wonder then that Echostar - the satellite television broadcaster run by Charles Ergen - has accumulated a chunk of that debt in the hopes of nabbing control of the company. The only alternative to folding the company to Echostar (SATS) would be finding a buyer willing to recapitalize the business and pay off its imminent debts.

In theory, there is some logic behind this notion. Just look at the numbers. Sirius XM (SIRI) currently has nearly 20 million subscribers and, despite the slump in car sales that drive new satellite radio subscriptions, is still growing rapidly. The company should still be able to double its subscriber base in ten years' time.

On that basis, it's possible to determine a net present value for Sirius. Investors currently rate satellite TV subscribers at about $1,000 each. Satellite radio subscriptions cost less than half those of television, so let's assume each may be worth $450. At 40 million customers, that's a total value of some $18 billion by 2019.

Of course, a dollar that might show up tomorrow isn't worth that much to shareholders today. So let's discount back the value of those future subscribers by 15% annually. By that calculation, Sirius should be worth about $4.5 billion now. That's $1.1 billion more than Sirius XM's current enterprise value.

That should give Sirius boss Mel Karmazin some hope, no? Think again. While the value may be there sometime in the future, it's hard to see anyone in this credit-crunched environment stepping forth.

Sure, an investor could take control of the company by recapitalizing it. But they'd need to inject at least $1 billion of equity today to see off Sirius' imminent funding gap and bridge it to profitability.

It's not impossible. And the synergies that Ergen sees for Echostar might be attainable by his rivals like John Malone's DirecTV (DTV, Fortune 500) or Comcast. But with markets still volatile, their shareholders are unlikely to support such acquisitive derring-do.

Sirius' days look seriously numbered. To top of page


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