Goldman Sachs offered an even gloomierforecast for XM

Tag : Satellite Tap

NEW YORK (Fortune) -- Goldman Sachs offered an even gloomierforecast for XM and Sirius Thursday. Citing a dramatic slowdown insubscriber growth, high debt costs, refinancing pressure and ashrinking trend in revenue per customer, Goldman analyst MarkWienkes cut his XM ( XMSR ) price target to $6.50 from $11.50 and reduced Sirius ( SIRI ) to $1.75 from $2.25. The $1.75 price on Sirius assumes theproposed merger with XM is approved - on a standalone basis,Wienkes values Sirius at $1.
XM shares fell 17% and Sirius was down 13% Thursday.
Goldman's lack-of-confidence vote comes as the FederalCommunications Commission attempts to reach a decision on themerger of the only two satellite radio operators. On Monday, FCCchairman Kevin Martin recommended an approval with relatively minorconcessions. But instead of resolving the 15-month review, thefive-member agency seems to be in a debate over what conditionsneed to be attached to the deal to ensure price protections andpreserve competition.
As the clock ticks, cash bleeds out of the money-losing pay radio shops. As XM reported in thefirst quarter, sales have stagnated, its costs to acquiresubscribers have increased, and its debt level jumped 12% in threemonths, to $1.66 billion.
Even if the deal closes without detrimental conditions, thecombined company is hardly out of the woods. After a rapid growthphase earlier this decade, satellite radio sales have plunged dueto a sluggish economy and slumping car sales. XM's cash fell to$156 million in February and the company was forced to tap $187.5million from its $250 million credit line.
The cash troubles weigh heavily on the weakening fundamentals ofpay radio.
The appeal of satellite radio is declining in the youth market askids lean more toward MP3s, says Goldman's Wienkes. This trendundercuts retail satellite radio sales and is leaving more of thenew subscriber growth in the hands of its auto partners. But onlyabout half of new car buyers decide to sign on as paying satelliteradio customers after their free trial period ends. As moresubscribers flee, the company is left with higher customeracquisition costs.
Heavy cash consumption has hexed the broadcasting duo from the getgo, and even with the so-called merger synergies, the debts willcontinue to pile on and the financing needs will keep knocking.
"XM and Sirius may choose to raise $500 million to $1 billionin capital as early as the third quarter and more likely by thefirst quarter of 2009," writes Wienkes, who adds that thecombined company will also need to refinance as much as $1.46billion in XM debt.
Financing, in a tightening credit market is looking more and morelike a dark hole.