Steve Quayle News Alerts

June 23, 2003
By: Sam Silverstein, Space News Staff Writer

With several key subscriber and financial milestones now firmly under its belt, the U.S. satellite radio industry is emerging as an attractive option for investors, according to satellite industry officials and analysts.

XM Satellite Radio Inc. of Washington and rival Sirius Satellite Radio Inc. of New York finally have begun to demonstrate that there is a market for subscription-based radio services, and their success in attracting customers and financing is lighting a fire on Wall Street, said Jimmy Schaeffler, head of the Carmel Group, a media research firm in Carmel, Calif.

Both firms’ stock prices are up sharply in 2003 following several years of decline. Shares in Sirius — which flirted with bankruptcy earlier this year — are worth three times as much now as they were at the beginning of the year, while XM’s stock price is up fourfold since the start of January.

Schaeffler said XM and Sirius are seeing their stock prices rebound sharply because they are consistently posting strong gains in subscribership and have eliminated most concerns about their financial condition.

Both companies continue to lose money, and neither expects to reach a break-even point for several years. But Schaeffler said their ability to meet their own projections and satisfy investor expectations is exactly what the stock market wants to see.

“Sirius and XM are well run, and they’ve done what they said they were going to do,” Schaeffler said. “It all suggests there’s a lot more reason to be positive on these players than there ever has been.”

XM began offering its service in late 2001 and continues to enjoy a substantial lead over Sirius, which began commercial operations several months later. XM has more than a half-million subscribers and projects it will count 1.2 million subscribers by the end of 2003. Sirius, which reported 68,000 subscribers at the end of March, is on target to have 300,000 subscribers by the end of the year, said Jim Collins, a company spokesman.

Both companies also have made significant progress on the financial front. In March, Sirius converted most of its crushing debt load into equity, allaying concerns it would be forced into bankruptcy but leaving it with unmet cash needs of about $75 million for operating expenses and $20 million to cover interest payments. Sirius closed that funding gap -- and gave itself some financial breathing room -- in recent weeks by selling $175 million in bonds and issuing 75 million shares of stock worth about $127 million.

XM also has shored up its finances this year, in part through a January deal that brought in $225 million in new funds and defrayed or eliminated some debt owed to backer General Motors Corp. of Detroit.

“I think the market views XM and Sirius as having turned a corner,” said Phil Spector, a satellite industry attorney with Paul, Weiss, Rifkind, Wharton and Garrison in Washington.

The ascent of XM and Sirius in investment circles has not gone unnoticed in other parts of the commercial satellite industry, where stock values have suffered in recent years.

“XM is a microcosm. It says if you have a good, solid business plan and execute, you’ll be successful no matter what the environment is,” said Dean Olmstead, chief executive officer of SES Americom, a fixed satellite services provider based in Princeton, N.J.

Spector said the positive attention satellite radio has been receiving lately is not by itself a reason to expect other satellite sectors to take a turn for the better. “This has less to do with them being space-based than it does with filling a consumer need,” he said. “They’re being treated very much on their own.”

Schaeffler said satellite radio is comparable to the now-mature satellite television business, which got its start in the mid-1990s. Sirius and XM have to compete with each other and position themselves as alternatives to traditional radio stations, much as satellite TV providers DirecTV Inc. and EchoStar Communications Corp. compete with one another as well as with cable TV operators, he said.

“XM will constantly be looking over its shoulder at Sirius,” putting pressure on both firms to perform, Schaeffler said.

Even as shares in XM and Sirius show new signs of life, the companies have a long way to go to equal their values of several years ago, when the stock market was booming and investors were eager to place bets on unproven concepts.

Sirius, which closed June 19 at $1.80, traded as high as $65 per share in early 2000, then entered a long, steady decline in 2001 and 2002. XM hovered in the $40-per-share range into late 2000, but by May 2002 was in the single digits, where it stayed until last month. XM finished trading June 19 at $10.75.

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