Stern to Sirius: S&P Is Unimpressed

The shock jock should help the satellite radio outfit add subscribers -- and boost operating costs. S&P leaves its credit rating at CCC

On Oct. 6, Standard & Poor's Ratings Services said Sirius Satellite Radio's (SIRI ) exclusive five-year agreement with radio personality Howard Stern and his production company doesn't affect Sirius' credit rating (CCC) or outlook (stable).

Under the agreement, Stern will produce one or more channels, which will include his weekday morning show, for Sirius' pay radio service, starting on Jan. 1, 2006. While the popular shock jock, who has roughly 12 million regular daily listeners for his nationally syndicated show, should help accelerate subscriptions for Sirius, his participation will also boost operating costs substantially.

Estimated annual fixed costs for the agreement are $100 million, plus various stock-incentive compensation and revenue-sharing arrangements. This adds to Sirius' already considerable operating costs, which is a concern given that the company incurred a $304 million discretionary cash flow deficit in the 12 months ended June 30, 2004.

Sirius estimates that it can cover the fixed contract costs if the deal adds 1 million new subscribers. Reaching this target could pose a challenge, as it's a hefty increase from the 600,000 subscribers Sirius had as of early September, 2004, after 2.5 years of operation, and from its goal of 1 million by the end of 2004. It also increases the number of subscribers needed to break even to 3 million to 3.5 million, a substantial change.

Meaningful cash outlays for the contract aren't expected to begin until 2006, and it's important that Sirius demonstrate significant progress in accelerating subscriber growth and reducing subscriber acquisition costs during this time. It's also critical that Sirius maintain ample liquid resources. At June 30, 2004, near-term liquid assets were sizable, at $640 million.