GIVE 'EM HELL, MEL.
That's what investors in Sirius Satellite Radio (SIRI) are hoping will happen when Mel Karmazin takes the reins of the suddenly resurgent entertainment company. Sirius announced late Thursday the hiring of the former Viacom (VIA.B) president as chief executive, another in a string of high-profile moves to bolster its position against archrival XM Satellite Radio Holdings (XMSR). Last month, Sirius inked a $500 million deal with Howard Stern that secured the services of the entertainer starting in 2006. Shares of Sirius, based in New York, jumped 10% to a 2 1/2-year high of $5.17 Friday.
"The addition of Mel Karmazin to the helm of Sirius is symbolic of the sea change that satellite radio is undertaking as it shifts from an interesting, high-growth tech story to a mainstream media player," says Maurice McKenzie, an analyst at Arlington, Va., investment bank Friedman Billings Ramsey. "Mel's addition to the industry will accelerate that progression."
It's been quite a week for Sirius, which provides more than 120 channels of mostly commercial-free music, sports, information and entertainment programming. Even before the Karmazin announcement, the stock was on a roll on reports that Stern was trying to get out of his contract with his current employer, Viacom's Infinity Broadcasting. That pact — the only thing standing between Stern and a slot on Sirius — doesn't expire until the end of 2005. A deal with Mercedes-Benz USA to offer satellite radios as a factory-installed option in nearly all 2005 models also heartened investors, as did Target's (TGT) decision to stock Sirius radios at more than 500 of its stores. All told, shares of Sirius climbed 24% for the week.
It's also been a great week for CIBC World Markets, which initiated stock coverage of Sirius with a Sector Outperform rating last Friday. Unfortunately, the same couldn't be said for Banc of America Securities, which lowered its rating to Sell from Neutral just hours before the Karmazin announcement and a publicity stunt by Stern. The disc jockey spent Thursday promoting his new employer with a huge radio give-away at a New York City park and an appearance on "Late Show with David Letterman."
While the Stern signing was a watershed moment for Sirius, nabbing Karmazin could prove to be even more pivotal — for the company and for satellite radio as a whole.
"This is very good for the industry in creating more buzz," says David Kestenbaum, an analyst at IRG Research, an independent research house in New York. "Previously, Mel had been negative on satellite radio. This is a big stamp of approval for satellite that he is on board."
Not only does Karmazin bring instant credibility to the company, says Kestenbaum, but he's also expected to rein in Sirius's soaring costs. Not that the man he is replacing, Joseph Clayton, did a bad job. Clayton did sign Stern, and he talked the National Football League into an exclusive deal to broadcast every game live. Clayton will remain the company's chairman. (Kestenbaum doesn't own shares of Sirius Satellite Radio; IRG Research doesn't do investment banking.)
A New York native, Karmazin turned Infinity into one the nation's largest radio networks with more than 200 stations. A major driver of that growth was his hiring of Stern after WNBC fired the DJ nearly 20 years ago. As president and CEO of Infinity Broadcasting, he merged the company with Westinghouse/CBS in 1997, becoming the CEO of the renamed CBS. When that was bought by Viacom, he became the president and chief operating officer of the media giant.
Every company he ran became a Wall Street darling as Karmazin focused on cutting costs and boosting shareholder value. However, when Viacom's stock price stagnated, his status as heir apparent to Viacom CEO Sumner Redstone dissolved amid boardroom battles over operational control and authority. With his ascension no longer guaranteed, Karmazin quit Viacom in June.
In an interview on CNBC Friday, the 61-year-old Karmazin said he was taking on the challenge of Sirius because he's an entrepreneur.
"The thing I love the most is building a company, and I think this will be a whole lot of fun," said Karmazin. "The criteria I laid out after Viacom was to be the CEO of a growth company. And I'm talking double-digit growth. Not low single-digit growth — but really strong growth. I made an awful lot of money for investors and myself when I joined Infinity in 1981. It was a $10 million company; when I sold it to Viacom, it had a valuation of $18 billion."
Karmazin reportedly received a five-year contract from Sirius. The deal pays him $1.25 million a year in cash, and grants him 30 million shares in stock options.
Kit Spring, an analyst at Stifel Nicolaus, a Denver-based investment bank, wrote on Friday that Karmazin is the premier radio/media executive because he has "the most intense focus on shareholder value of any media executive we've seen over the past 10 years...Some key abilities that Mr. Karmazin brings to the table are motivating sales forces, keeping a sharp on eye on expenses, keeping talent happy, and his own elite selling and promotional skills with investors." (Spring doesn't own shares of Sirius Satellite Radio; Stifel, Nicolaus makes a market in the stock.)
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The company could use Karmazin's deft financial touch. Sirius lost $169.4 million, or 14 cents a share, for the third quarter on revenue of $19.1 million. The company is on track to reach one million subscribers by year's end, compared with XM Satellite's 2.5 million as of Sept. 30.
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"Clayton did a good job, but this was an opportunity to recruit a top media talent and help the company enter the media mainstream," says McKenzie of Friedman Billings Ramsey. "This will change how Sirius perceives itself, and that competitors should perceive it as a serious contender. I think Karmazin is a boost for both Sirius and XM — you can have two winners in this growth market. We think there is still upside from current levels. We're looking for free-cash-flow break-even by the end of 2007. If Karmazin is able to bring additional management and operational efficiencies, we could see that date accelerated. From an investor's point of view, this is a buy-and-hold stock." (McKenzie doesn't own shares of Sirius Satellite Radio; Friedman Billings Ramsey makes a market in the stock.) |
