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For Sirius, Karmazin Needs More Than Just Nerve

Posted on: Thursday, 7 August 2008, 06:10 CDT

By Andrew Ross Sorkin

Mel Karmazin says he spent the past year of his life in constant fear that his dream deal - the merger of Sirius Satellite Radio and XM Radio - was about to unravel. Now comes the fun part.

A year and a half after Karmazin announced that Sirius would buy XM to form a satellite radio giant, the deal was finally approved by regulators and completed last week. And while integrating mergers is a nightmare for most executives, Karmazin, chairman of the newly minted Sirius XM Radio, says he loves it. He has to cut about $400 million in annual costs and seems almost giddy at the prospect.

"When I became the CEO of CBS, the first thing I did was sell the artwork," he said with a smirk, referring to his tenure at Viacom before being ousted after a public battle with Sumner Redstone. For good measure, he left the walls bare to remind employees he was running a tight ship.

Then, unsolicited, he added, "You know, the movie I'm most proud of is 'Jackass.' It cost me $6 million and made $100 million."

Sirius employees do not need to be convinced of Karmazin's nerve or cheapness. But it is a bigger task to persuade investors that Sirius XM has a profitable future. Since Karmazin jubilantly presented the blockbuster deal 18 months ago, the market for satellite radio - and the U.S. economy - are in a very different state.

The company, which combined or uncombined has never turned a profit, was running out of money so quickly it had to add some $1.2 billion of debt onto its books, its shares have plummeted from $3.74 at the time they reached the proposed deal to $1.43, and the automobile market - satellite radio's bread and butter, since most units are factory installed - is in free fall. In its second quarter, Sirius lost $24 million on $283 million in revenue.

And yet Karmazin, tanned and svelte, seems at ease. Last week, he was chattering away on the phone in his corner office, just one floor above his biggest star, the radio shock jock Howard Stern.

Karmazin said he was on the line with "an important customer" who, it turned out, was Robert Wright, the former chairman of NBC, which provides several stations to Sirius, including the one Karmazin said was his favorite on the entire dial, CNBC.

If Karmazin had his way, he would have already moved out of Sirius's fancy digs in Midtown Manhattan - two floors of fully outfitted glass and steel radio studios for its roster of stars like Martha Stewart and Eminem in the tony McGraw-Hill building, including a specially built wing for Stern. When Karmazin first got the job at Sirius, he walked into the offices and said: "Oh, my God. We have a lease here? Do we know we're losing money and this is radio?"

The lease lasts for at least several more years, he says, "so I have no Jewish guilt." When it is over, he suggested jokingly, they may have to move the company to Queens or New Jersey.

The question remains whether Karmazin can succeed beyond simply cost-cutting, which is likely to come from the company's enormous advertising budget and the elimination of duplicative jobs. Some analysts have been skeptical. Mark Wienkes, an analyst at Goldman Sachs, says the combined company is a "niche market opportunity" with a "mass-market cost structure." He has a "conviction sell" rating on the stock.

Likewise, Citigroup released a report last month suggesting that weakness among automobile makers "was worrisome for near-term sub growth, offsetting some of the positives."

On top of that, Sirius still faces pressure from terrestrial radio, wireless broadband - and yes, iPods.

Of course, whether those outlets posed a threat to satellite radio was the exact question that the U.S. Justice Department and the Federal Communications Commission had to answer. When Echostar and DirectTV tried to merge in 2003, the deal was blocked on the grounds that it would lead to less competition.

Karmazin, who testified in Washington four times in the process of seeking approval for his merger, said his ace in the hole was that many terrestrial radio stations came out against the Sirius-XM tie-up.

"It was the best thing that happened," he said, explaining that it demonstrated that Sirius and XM did not just compete against themselves.

Karmazin said he had wanted to do this deal from the day he was first recruited for the job by Leon Black, the billionaire financier who runs Apollo Management and who is a board member of Sirius. In fact, when they first spoke, Black was pressing Karmazin to acquire a terrestrial radio company like Clear Channel Communications to help provide a steady stream of cash to help support the money- losing satellite business.

Instead, Karmazin, who increased subscribers to 8.9 million from some 600,000, become convinced that he could get a Sirius-XM deal past regulators and that unlike terrestrial radio, with its legacy costs, he could make it a fast-growing company.

Holed up in his apartment in Trump Tower overlooking Central Park, he conducted a 24-hour marathon of negotiations to seal the deal - in the process consulting James Lee Jr., vice chairman of JPMorgan Chase, who shuttled between rooms in Karmazin's apartment.

Despite the sluggish economy, Karmazin said his product was so affordable that he could not imagine it would be affected much. "Forty-three cents a day - it's not even vending machine coffee," he said.

When it comes to auto sales, he said he was still encouraged because the rate of consumers choosing to install Sirius was more than 50 percent and continuing a positive trend.

Source: International Herald Tribune

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