Just two days after the New York pay radio shop
signed the Long Island shock jock to a $500 million, five-year deal, Sirius moved quickly to silence critics who questioned the company's ability to pay for the pricey deal. Sirius said Friday that it would sell $290 million worth of stock and convertible debt to improve its finances.
The company's return to the capital market reignited a fiery debate on Wall Street between believers in the satellite radio duopoly of Sirius and
, and its scores of doubters. Sirius fell 6% on the move, while XM rose 1%.
Fans say Sirius' decision to grab more scratch so soon after the big signing shows the company continues to have easy access to the capital markets. But bears say the move proves that Sirius' cash-incinerating business will always need more fuel, and that investors will find themselves with little to show for all their loyalty.
The stock, which jumped 28% at one point Wednesday on word of the Stern deal, has now dropped 11% from that high. Sirius shares dropped a quarter to $3.75 in midday trading Friday.
While some observers were calling Stern's signing a "sea change" event for radio, similar to how HBO's arrival
heralded the rise of pay TV, others caution that without a huge surge in subscriber growth, Sirius will never cover its costs.
At last count the company had amassed some 600,000 customers in the course of two years. That suggests Sirius may be hard pressed to hit its 1 million subscriber goal this year. Meanwhile rival XM, with its one-year jump on operations, said last week that it has 2.5 million customers and is closing in on its 3.1 million subscriber goal for 2004.
Sirius helped justify the Stern deal by saying it will break even on the costs once it acquires a million additional subscribers. But a few analysts say those numbers don't quite add up.
"We believe Mr. Stern will need to bring in 2.7 million subscribers over and above the 1.6 million of his listeners that we think would have signed up for Sirius service anyway during the period, for a total of 4.3 million," writes Legg Mason analyst Sean Butson in a research note Friday. Buston has a neutral rating on the stock, Legg Mason seeks banking business from Sirius.
With the new $290 million infusion added to the $634 million already on the books, Sirius' bank account swells to nearly $1 billion. And with 2004 showing an annual cash burn rate of about $270 million, Sirius appears to have at least three years' worth of funding in the bank. But that doesn't factor in Stern's $100-million-a-year contract.
So if Stern fails to draw several million customers right away, you can bet Sirius will be back in front of investors testing the theory that cash will always easy to raise.