Last Updated: May 13, 2008: 10:34 AM EDT
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XM's costs pile up as merger stalls

The satellite radio service boosts borrowing as its year-long wait to merge with Sirius drags on - and threatens its survival.

By Scott Moritz, writer

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NEW YORK (Fortune) -- XM Satellite Radio reported Monday more of the same as it limps toward a final decision on its proposed merger with rival Sirius Satellite Radio: Slower growth and wider losses.

The Washington, D.C. broadcaster, which released quarterly earnings, offered no update on the status of the biggest deal in satellite radio history. The Justice Department has signed off on the combination, leaving the Federal Communications Commission to decide whether to put conditions on its likely approval of the merger.

With the deal in limbo, XM (XMSR) has watched as sales have stagnated, its costs to acquire subscribers have increased, and its debt level jump 12% in three months, to $1.66 billion. These are uneasy times for a company with heavy losses, coming off a rapid growth phase and now entering a sluggish consumer environment. In February, with no merger in hand, and its cash level down to $156 million, XM tapped $187.5 million from its $250 million credit line.

As one analyst noted Monday: XM was "keeping the lights on" until the FCC clears the merger. But the cost of keeping the lights on isn't getting any cheaper. XM is working on getting a break from its bondholders. And Cowen analyst Tom Watts says creditors' "consent is likely to be granted at a moderate cost." Not only could the terms be a little more expensive, the company is also facing a looming $400 million debt payment next year.

For the first quarter ended March 31, XM posted an adjusted loss of $30.7 million, or 42 cents a share, compared to a loss of $27 million, or 40 cents a share in the year-ago quarter. Sales were $308 million, up 16% from the $264 million level last year. But the top- and bottom-line results missed analysts' targets calling for a loss of 39 cents on $313 million in revenue.

Despite one million gross subscriber additions, the company managed to add only 303,000 net new users after subtracting all the people who canceled service. That compares to the 868,000 gross additions and 285,000 net subscribers gained in the same period last year.

New cars purchased with XM radios accounted for 802,000 of the gross adds and all of the subscriber growth, but the company retains only about 53% of those promotional users as regular customers. The retention rate improved from 51% in the year-ago quarter. With retail sales of XM radios still disappointing, XM has to rely heavily on car sales in a less-than-robust auto market.

Citing the stalled merger, XM executives, speaking to analysts during an earnings conference all, declined to give any financial guidance.

Sirius (SIRI) reported in-line results Monday in after-hours. On customer gains, the company said gross subsciber adds were 1 million with a total of 332,538 net new subscribers. That compares with 988,458 gross additions and 556,500 net adds a year ago. Like XM, Sirius said it would hold off on a business forecast until it received an FCC decision about the merger.  To top of page

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