XM and Sirius circle a black hole

NEW YORK (Fortune) -- Goldman Sachs offered an even gloomier forecast for XM and Sirius Thursday. Citing a dramatic slowdown in subscriber growth, high debt costs, refinancing pressure and a shrinking trend in revenue per customer, Goldman analyst Mark Wienkes 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 the proposed 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 Federal Communications Commission attempts to reach a decision on the merger of the only two satellite radio operators. On Monday, FCC chairman Kevin Martin recommended an approval with relatively minor concessions. But instead of resolving the 15-month review, the five-member agency seems to be in a debate over what conditions need to be attached to the deal to ensure price protections and preserve competition.

As the clock ticks, cash bleeds out of the money-losing pay radio shops. As XM reported in the first quarter, sales have stagnated, its costs to acquire subscribers have increased, and its debt level jumped 12% in three months, to $1.66 billion.

Even if the deal closes without detrimental conditions, the combined company is hardly out of the woods. After a rapid growth phase earlier this decade, satellite radio sales have plunged due to a sluggish economy and slumping car sales. XM's cash fell to $156 million in February and the company was forced to tap $187.5 million from its $250 million credit line.

The cash troubles weigh heavily on the weakening fundamentals of pay radio.

The appeal of satellite radio is declining in the youth market as kids lean more toward MP3s, says Goldman's Wienkes. This trend undercuts retail satellite radio sales and is leaving more of the new subscriber growth in the hands of its auto partners. But only about half of new car buyers decide to sign on as paying satellite radio customers after their free trial period ends. As more subscribers flee, the company is left with higher customer acquisition costs.

Heavy cash consumption has hexed the broadcasting duo from the get go, and even with the so-called merger synergies, the debts will continue to pile on and the financing needs will keep knocking.

"XM and Sirius may choose to raise $500 million to $1 billion in capital as early as the third quarter and more likely by the first quarter of 2009," writes Wienkes, who adds that the combined company will also need to refinance as much as $1.46 billion in XM debt.

Financing, in a tightening credit market is looking more and more like a dark hole.