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First on CNBC Interview: CNBC's David Faber Sits Down with Mel Karmazin, the New CEO of the Combined Sirius/XM Satellite Radio, on CNBC's "Squawk on the Street" (Transcript Included)

Jennifer Dauble
Friday, 1 Aug 2008 | 8:28 PM ET
Mel Karmazin, CEO, Sirius
Mel Karmazin, CEO, Sirius

WHEN: Wednesday, July 30, 2008
WHERE: CNBC's "Squawk on the Street"

Following is the unofficial transcript of a FIRST ON CNBC interview with Mel Karmazin, the new CEO of the combined Sirius/XM Satellite Radio.

All references must be sourced to CNBC

CNBC's David Faber: MEL KARMAZIN, THE CEO OF THE NEW COMBINED SIRIUS/XM SATELLITE RADIO. A PLEASURE TO HAVE YOU.

Mel Karmazin: THANKS. GOOD TO BE HERE, DAVID.

Faber: 17 MONTHS AGO, YOU ANNOUNCED PLANS TO GET THESE TWO COMPANIES TOGETHER. YESTERDAY YOU CLOSED THIS DEAL. DID THE LONG PERIOD OF TIME HURT THE PROSPECTS FOR THIS COMBINED COMPANY?

Karmazin: NO. I THINK THE PROSPECTS FOR THE COMBINED COMPANY ARE EXTRAORDINARY. IT CERTAINLY PUT THE COMPANY IN LIMBO FOR FAR TOO LONG. IT CERTAINLY HAD CONFUSION IN THE MARKETPLACE, IN RETAIL PARTICULARLY. AND IT ALSO PUT US ON RADIO SILENCE AS FAR AS TALKING TO INVESTORS. SO, IT TOOK FAR TOO LONG. I'M GLAD IT'S DONE. I LIKE THIS OUTCOME BETTER THAN TAKING THE TIME AND HAVING IT NOT HAPPEN. WE HAD TO DEAL WITH THE CHANGE OF CONTROL IN XM DEBT. SO, IN THE LAST WEEK, IN A VERY UGLY MARKET, WE RAISED $1.250 BILLION. IT WAS UGLY RAISING THE MONEY, BUT THE GOOD NEWS IS WE GOT IT DONE, AND WE RAISED THE LAST PIECE OF THE MONEY ON MONDAY NIGHT AT 7:00, AND WE CLOSED THE MERGER MONDAY NIGHT AT 8:00.

Faber: ON THE POINT OF MONEY, ARE YOU DONE? ARE YOU FULLY FINANCED AT THIS POINT AT SIRIUS XM?

Karmazin: YEAH. ANY LIQUIDITY QUESTION THAT HAD EXISTED ON THE INDIVIDUAL COMPANIES, OBVIOUSLY, ARE NOW PUT TO REST.AND ON THE COMBINED COMPANY, YOU KNOW, WE HAVE A FULLY FUNDED PLAN. YOU KNOW, WE HAVE SOME CONVERTS THAT COME DUE IN 2009, AND WE'RE OPTIMISTIC THAT ON THE SIRIUS SIDE, THAT INVESTORS WILL START TO SEE THE VALUE OF THIS COMBINATION AND WE'LL PRICE THROUGH. IT AND IF FOR ANY REASON WE DON'T, YOU KNOW, WE'LL JUST ROLL THOSE OVER SOME TIME IN 2009 OR FINANCE IT WITH SOMETHING THAT MIGHT BE MORE ATTRACTIVE. BUT YEAH, YOU KNOW, WE FEEL REALLY GOOD ABOUT OUR LIQUIDITY.

Faber: YOU JUST SAID YOU EXPECT, HOPEFULLY, INVESTORS WILL START TO SEE THE VALUE OF THIS TRANSACTION. I ASSUME A LOT OF THAT COMES THROUGH ON THE SYNERGIES THAT HAVE BEEN TALKED ABOUT FOR THE LAST 17 MONTHS. WHAT CAN YOU TELL US IN TERMS OF WHAT YOU REALLY SEE AS THE COST SAVINGS, FROM THE DEAL THAT FINALLY GOT DONE?

Karmazin: DAVID, I THINK THE FIRST THING TO LOOK AT IS IF YOU JUST LOOK AT THE TRAILING 12 MONTHS REVENUE OF THE COMBINED COMPANY, WE HAVE $2.2 BILLION. THAT'S PROBABLY A NUMBER GREATER THAN MOST PEOPLE THINK ABOUT WHEN THEY THINK ABOUT SATELLITE RADIO. THAT MAKES US THE SECOND LARGEST RADIO COMPANY IN THE UNITED STATES. ONLY CLEAR CHANNEL WILL HAVE HIGHER REVENUE, AND THEIR GROWTH -- THERE IS NO GROWTH, AND WE'RE GROWING DRAMATICALLY. WHEN YOU TAKE A LOOK AT THE NUMBER OF SUBSCRIBERS -- OVER 19 MILLION SUBSCRIBERS -- THAT MAKES US SECOND TO COMCAST IN THE SUBSCRIPTION BUSINESS, MORE THAN DIRECTV, ECOSTAR --

Faber: ALL IMPRESSIVE MEL--

Karmazin: AND NOW THE SYNERGIES.

Faber: -- BUT LET'S TALK ABOUT THE FUTURE HERE.

Karmazin: AND I THINK THAT IS THE FUTURE, OKAY? I THINK THE FACT THAT WE HAVE IDENTIFIED IMMEDIATELY $400 MILLION OF SYNERGY ON VIRTUALLY EVERY LINE ITEM OF THE P&L, SYNERGIES THAT WE ARE VERY, VERY CONFIDENT TO BE ABLE TO DELIVER NET OF THE COST BEFORE 2009. SO WHEN YOU TAKE THAT SYNERGY AND YOU ADD IT TO THE COMBINED COMPANY, YOU GET, FOR THE FIRST TIME, POSITIVE EBITDA. NOW, IN MY OPINION, POSITIVE EBITDA ISN'T THE SAME THING AS MAKING MONEY.SO, WE'LL HAVE $300 MILLION OF EBITDA IN 2009, AND BUT FOR A PAYMENT CONNECTED WITH THE SATELLITE, SIRIUS IS PUTTING UP A NEW SATELLITE IN '09, AND WE HAVE ONE PAYMENT -- BEFORE THAT SATELLITE, WE WILL BE FREE CASH FLOW POSITIVE.

Faber: OH, MY GOD, FREE CASH FLOW POSITIVE. YOU KNOW HOW MANY TIMES I'VE BEEN ASKING YOU THIS QUESTION, WHEN ARE YOU GOING TO BE FREE CASH FLOW POSITIVE? SO ARE YOU ANSWERING IT OR NOT?

Karmazin: I'M ABSOLUTELY ANSWERING IT, AND WE WOULD HAVE BEEN FREE CASH FLOW POSITIVE AT SIRIUS, FOR SURE. IT WOULD HAVE TAKEN US LONGER, BUT ONCE THAT PAYMENT IS DONE IN '09, YOU SHOULD THINK ABOUT SIRIUS AND YOU SHOULD THINK ABOUT VALUING SIRIUS. YOU KNOW, WE CAN TALK ABOUT WHAT THE COMPANY COULD BE WORTH OR ISN'T WORTH, BUT WHEN YOU'RE GOING TO VALUE OUR COMPANY, YOU'RE GOING TO VALUE US ON FREE CASH FLOW, BECAUSE THAT'S WHAT WE'RE RUNNING THE COMPANY FOR. AND THIS COMPANY COMBINED IS A COMPANY THAT WOULD GENERATE A LOT OF FREE CASH FLOW, AND THAT FREE CASH FLOW IS GOING TO CONTINUE TO GROW.

Faber: LET'S TALK ABOUT THE CURRENT ENVIRONMENT. OBVIOUSLY, CAR SALES VERY IMPORTANT, BECAUSE YOU COME INSTALLED IN SO MANY MODELS. THEY'RE DOWN SHARPLY. IS THAT GOING TO HURT YOU? AND WHAT ABOUT CHURN, GIVEN TOUGH ECONOMIC TIMES, ARE YOU SEEING AN INCREASE IN PEOPLE WHO SAY AFTER THE THREE MONTHS FREE, I'M NOT INTERESTED?

Karmazin: WE JUST ISSUED OUR SECOND QUARTER, XM AND SIRIUS, PUT THE NUMBERS OUT QUICKLY SO SOMEBODY COULD LOOK AT IN THE SECOND QUARTER WHAT'S HAPPENING TO CHURN THERE. WAS NO BUMP UP AT ALL.AS A MATTER OF FACT, SIRIUS' SELF-MADE CHURN IMPROVED FROM THE FIRST QUARTER, AND ON CONVERSION RATES, XM'S CONVERSION RATES, WHICH THEY HAVE BEEN REPORTING FOR A LONG TIME, HAVE BEEN STEADY. AND SIRIUS WENT UP IN THE SECOND QUARTER TO FIRST QUARTER. REGARDING CAR SALES SLOWING DOWN, REAL FACTOR. WE WISH THAT THAT'S NOT THE CASE, BUT THE PENETRATION RATE THAT WE'RE EXPERIENCING IS OFFSETTING IT. WE'VE ADDED MORE GROSS ADDS FROM OEM THIS YEAR -- OR SO FAR THIS YEAR -- THAN IN ANY PERIOD OF TIME IN OUR HISTORY.

Faber: SO, YOU'RE NOT SEEING ANY HEAD WINDS FROM THE TOUGH ECONOMY, PEOPLE SAYING, YOU KNOW WHAT, IT'S $12 A MONTH, IT'S A GOOD SERVICE, BUT I DON'T NEED TO PAY IT?

Karmazin: YEAH, IF YOU SPEND TIME IN YOUR CAR, THE 43 CENTS A DAY -- WE'RE NOT SEEING ANYTHING. IT'S A LOGICAL QUESTION, IT'S SOMETHING WE'RE WATCHING.BUT IF YOU THINK ABOUT THE FACT THAT IF DETROIT SLOWED DOWN FROM 16 MILLION TO CALL IT 14 MILLION, AND OUR PENETRATION RATE IS IN 50% OF THE CARS, AND OUR CONVERSION RATE IS ABOUT 50%, THEN WE'RE ADDING 3.5 MILLION NEW SUBSCRIBERS A YEAR AT ROUGHLY $120. SO, WE'RE ADDING $400 MILLION TO $500 MILLION A YEAR JUST IF DETROIT SELLS, YOU KNOW, 14 MILLION CARS.

Faber: RIGHT. I'VE GOT LESS THAN 30 SECONDS. THE STOCK PRICES IS VERY LOW --

Karmazin: IT SUCKS.

Faber: IT'S A VERY LOW PRICE. FORGET MARKET CAP. ARE YOU GOING TO DO A REVERSE SPLIT? IT'S EMBARRASSING TO LOOK AT SOMETHING WITH A ONE IN FRONT OF IT.

Karmazin: WELL, IT'S EMBARRASSING, AND I HOPE WE WON'T HAVE TO LOOK AT SOMETHING WITH A ONE IN FRONT OF IT FOR A LONG PERIOD OF TIME.

Faber: COULD YOU CONSIDER A REVERSE SPLIT JUST TO GET THE STOCK PRICE UP THERE? SOME PEOPLE CAN'T EVEN BUY THAT KIND OF A STOCK.

Karmazin: YOU KNOW, WE CAN CONSIDER ANYTHING, BUT THERE'S NOBODY THAT I FOUND THAT THEY REALLY CAN'T BUY IT. IF SOMEBODY REALLY WANTS TO OWN THIS STOCK and they WANT TO HAVE A GROWTH, THEY CAN BUY IT AT THIS PRICE. IT'S MECHANICS. IT'S A SPLIT, AND I JUST THINK THAT WALL STREET'S SMART ENOUGH TO KNOW WHAT THE VALUE IS.

Faber: WELL, 17 MONTHS, BUT YOU LOOK PRETTY GOOD. I'VE GOT TO SAY, MAN. I DON'T KNOW WHAT YOU'VE BEEN DOING --

Karmazin: I'VE BEEN ON A HUNGER STRIKE UNTIL I GOT THIS DEAL DONE.

Faber: MEL KARMAZIN, THANK YOU SO MUCH. THE CEO OF THE NEW COMBINED SIRIUS XM.




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