Satellite radio: Get rich and don't die tryin' by Eric Reguly
Source : Globe & Mail
December 10, 2005
Telus boss Darren Entwistle told me the other day he has regrets. One in particular stands out. He wishes he had done what John Bitove Jr. did. Flog fast food? Uh, no. He wishes he had gone after a satellite radio licence.
Don't we all. Mr. Bitove's Canadian Satellite Radio (CSR), now coming to a stock exchange near you, is as close to free money as you can get -- a prize handed out by the Canadian government, that is, by you and me. Mr. Bitove won it because he was clever enough to spot a no-lose opportunity and pursue it with Ahab-like zeal. Good for him and too bad for the rest of us who thought only billionaire visionaries willing to lose everything but their boxer shorts need apply.
But the government, through the Canadian Radio-television and Telecommunications Commission, didn't exactly throw a lot of roadblocks in the way of him or the other applicant, Sirius Canada. If you're a Canadian citizen -- no foreigners please -- you're half way there. If you win the licence, you don't have to run to the bank to pay for it. There is no competitive auction.
And what a win! CSR's $55-million initial public offering, at $16 a share for 6.8 per cent of the company, puts a $800-million value on the business. Mr. Bitove, through CSR Holdings, owns 57.3 per cent of CSR. That gives his stake a theoretical worth of about $450-million. Not bad for a couple of years' work.
The financial coup is even sweeter when you consider that Mr. Bitove and his insiders loaded up on stock options, 1.1 million of them to be exact. The option price? One cent, as in dollar minus 99 cents. Based on the IPO price of $16, they're worth $17.6-million. "Get rich and don't die tryin'," could be his motto (with apologies to another cent-arian, 50 Cent).
But let's not get carried away. Mr. Bitove is the company founder and is no greed-head on the options front. The standard was set in 1998, when Martin Weinberg, the former Assante CEO, was awarded options at one one-thousandth of a cent. But we digress.
Satellite radio is a marvellous thing. CSR and rival Sirius (owned by Standard Broadcasting, the CBC and Sirius Satellite Radio of the U.S.) are on the air and offering 100-plus channels featuring music of every description -- news, sports, comedy, children's programming and chat -- most of it commercial free. The service is geographically agnostic -- you can take the receiver from the house to the car, drive across the country and still get the same channels. CSR subscribers pay $12.99 a month (I am testing it and wonder if I would buy a CD again).
Mr. Bitove's amazingly rapid effort to snag the licence, build the company and launch the IPO and commercial service have earned kudos from fellow entrepreneurs, Bay Street and the media. Stories about the campaign invariably refer to his satellite radio "gamble." This is like saying the Bloc Québécois is gambling it will take Quebec in the election, or that the Japanese auto makers are gambling on relieving General Motors of some market share.
In truth, the beauty of the Canadian satellite radio services was a gamble factor at the low end of the scale. Neither CSR nor Sirius Canada invented satellite radio. That was done in the United States several years ago. The business case is proven. XM has a market value of $6.4-billion (U.S.). Together, XM and Sirius had 7.2 million subscribers at Sept. 30. They are adding close to one million subscribers every three months. The rate is bound to accelerate, as satellite radios are installed in more and more cars.
Enter Mr. Bitove. He must have thought business opportunities don't get any better than this. The satellites were already in place. The CSR prospectus cheerily notes that "we are not required to build, launch, maintain or manage our own satellites, which will save us significant time and capital."
In fact, CSR's capital expenditures have been insignificant compared to the fortunes spent by the U.S. services. So far, Bitove & Co. have spent $15-million (Canadian) for the licensing process and startup costs, and $45-million for the land-bound hardware, such as terrestrial repeater stations, and royalties to XM. A $75-million junk bond, for marketing, programming and other expenses, is coming.
After becoming XM's exclusive Canadian partner, the main challenge was making nice with the CRTC. He accomplished it with aplomb, no small feat for a rank media outsider. The CRTC made his job (and Sirius Canada's) easier by allowing him to dilute the standard 35 per cent Canadian content rules to a mere 10 per cent.
Mr. Bitove thinks satellite radio in Canada will be a hit and he's probably right. He deserves credit for seizing the moment. But the truth is most of the work was done for him before he entered the scene, and the CRTC posed only a small obstacle. Entrepreneur? For sure. Gambler? Forget it. Which makes you wonder how he can justify options at a penny.
