The $100-million-a-year salary money-losing Sirius Satellite Radio [SIRI] has agreed to pay FM radio shock jock Howard Stern when he hits the satellite radio airwaves Jan. 1, 2006, is a risky move that has the allure of incredible financial upside…if a significant portion of the controversial talk show host’s current estimated 12 million fans become paying subscribers to the fledgling service. Stern is under contract to Infinity Broadcasting through 2005.

“If you have big dreams, you have to do big things,” Sirius President/CEO Joseph Clayton told Satellite News. The total expenses of the $500 million, five-year pact could be covered of only 1 million of Stern’s fans subscribe to Sirius, Clayton said. The fees would compensate Stern and his staff as well as covering other expenses that include production, overhead, construction of a dedicated studio, and the development of additional programming and marketing concepts to capitalize on Stern’s arrival.

But Clayton is confidant Stern’s fan base will follow him to Sirius, saying, “I believe there is a lot more upside than 1 million subscribers.”

Sirius only needs to sign 8 percent of Stern’s estimated 12 million fans to get its “bait back,” said Clayton, a drawling Kentucky native whose favorite music is, of course, bluegrass. Stern has 8 million avid listeners in the 46 U.S. radio markets in which his show is carried. They are supplemented by another 4 million of his fans that don’t regularly hear his program.

The $500 million Stern package is more than double the $220 million in total expenses Sirius agreed to pay the National Football League earlier this year in a back-loaded, seven-year pact that will allow the broadcast of nearly every game. The NFL deal consisted of $188 million in cash and $32 million in stock.

The company’s financial obligations to Stern involve fixed and incentive payments that take the form of cash and stock.

“In addition, if we achieve the incentive milestones contained in the agreement, we believe that the material positive effects on our business will far outweigh the related incentive payments,” according to the company’s most recent 8-K filed with the Securities and Exchange Commis-sion. If Sirius generates substantially fewer than 1 million subscribers from Stern’s addition, Sirius would incur a “material negative impact” on its financial condition and operations, the document reported.

Clayton was involved in the successful rollout of direct broadcast satellite (DBS) services in the United States in the 1990s and he boasted that the bold move of hiring Stern will help to attract nearly three out of 10 of the radio-show host’s loyal fans to the second-to-market satellite radio service provider’s subscriber base, according to market research conducted for Sirius. Some 29 percent of Stern’s fans indicated they were “highly likely” to become satellite radio subscribers if Stern moved to that entertainment platform, said Ron Rodrigues, senior director of public relations at Sirius. In addition, Stern’s largely male audience, dominated by those in their 20s and 30s, have slightly- higher-than-average incomes, they tend to be early adopters of technology, and they are three times more likely to become satellite radio subscribers, according to the research findings.

“Stern has proven he can move his customer base,” Clayton said. His fans have supported the jock by following his political recommendations; by turning his two books into best sellers; by boosting the box- office numbers for his movie “Private Parts;” and by viewing his Web site, Clayton explained.

“This is not just about the ‘Howard Stern Show,'” Clayton said. “He will host the 6 a.m.-10 a.m. [drive-time] show but he also can produce other shows for Sirius.”

His hiring also gives Sirius another reason to convince its subscribers and other prospective listeners that the company’s monthly $12.95 fee is worth it, compared to the $9.99-a-month fee charged by Washington, D.C.-based rival XM Satellite Radio [XMSR].

“Stern is the biggest star in radio,” said Doug Kaplan, Sirius’ senior vice president of business affairs, development, entertainment and sports. “His signing is a watershed moment for satellite radio.”

According to Alden Mahabir, a satellite analyst with New York-based Vintage Capital Research, the Stern deal will erode Sirius’ cash cushion and leave it vulnerable to a $65 million “peak” cash shortfall that might require financing by the second half of 2005. This means Sirius may need to raise additional capital, said Bob Peck, a satellite analyst at Bear Stearns.

However, Peck’s cash flow analysis shows a positive Net Present Value (NPV) and Internal Rate of Return (IRR) that far exceed Sirius’ Weighted Average Cost of Capital (WACC). That assessment was enough for Peck to describe the move as a “significant positive” for Sirius that fortifies its programming lineup.

“This reinforces our belief that satellite radio will become ubiquitous and that investors should start to think of the duopoly of XM Radio and Sirius as Coke and Pepsi,” Peck wrote to his clients in a research note last Thursday.

Sean Badding, a satellite analyst with The Carmel Group in Carmel-by-the-Sea, Calif., said adding Stern was a “great strategic move” long term for Sirius. The company’s stock price jumped 15 percent on the day the deal was announced, and it appears to be six to nine months ahead of where it should be valued, he added. But while the price of Sirius’ stock has doubled in the past two months, the recent jump only amounts to a couple dollars a share; it was trading in the $2 range two months ago.

(Joe Clayton, Sirius Satellite Radio, 212/584-5192; Bob Peck, Bear Stearns, 212/272-6665; Alden Mahabir, Vintage Research, 646/472-5280; Sean Badding, The Carmel Group, 831/643-2222)