Tuesday, December 18, 2007

The Other Satellite Radio

The two big satellite radio players - Sirius (SIRI: Nasdaq) and XM (XMSR: Nasdaq) - are frequently in the news these days as the Justice Department weighs the monopoly implications of their proposed merger. The other satellite radio service gets few headlines. Indeed few people probably even realize a third satellite based digital radio services is is located in Silver Spring, Maryland.

It is not wonder
WorldSpace, Inc. (WRSP: Nasdaq) has not broken into the national consciousness. It has no exclusive sports programming or headline celebrities. No shock jocks draw cause millions to adjust their schedules to listen in. WorldSpace only has two U.S. licenses anyway. Most of its programming features Indo-Aryan languages: Marathi (India, Mauritius and Israel), Gujarati (India), Urdu (Pakistan), Pulaar and Soninke (West Africa). For English and French speakers there is sports news on Fox Sports Talk and RMC Info. WorldSpace also has arrangements with Bloomberg Radio, CNN, the BBC and Virgin Radio among others.

WorldSpace has one thing in common with XM and Sirius: breathtaking losses. In the twelve months ending September 2007, the company lost $157.3 million on $15.0 million in sales. From a cash flow standpoint, the figures are not quite as troubling. Net cash used by operations in 2006 was $104.1 million and another $88.7 million was used in the first nine months of 2007.

The question is: if XM and Sirius are allowed to merge, what will the implications be for the third satellite radio service? The potential savings for XM and Sirius operations is significant. Those savings along with new creativity in programming and a reenergized marketing effort could propel the combination to profitability. With one healthy satellite radio service in operation, could others follow?

WRSP shares could only be considered a speculative play. With those heavy loss even at $1.90 a share, the stock does not look like a bargain. XM is trading at 4.1 times sales and Sirius at 5.8 times sales. By comparison WRSP is trading at 6.2 times sales. The other problem with WorldSpace - at least in my view - is that over half the stock is held by insiders. While some investors like to see insiders with “skin in the game,” I am concerned that majority ownership by insiders breeds arrogance. It appears this management team feels much pressure to reduce the heavy flow of red ink. They have been successful in raising both debt and equity capital year after year and losses have simply mounted.

WRSP shares are nominally cheap and the company is in a nascent industry that is about to undergo significant positive change. Keep turning the dial (or punching the digital buttons)!

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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