XM Gains Money, Respect From Investors

Washington-based XM Satellite Radio [Nasdaq: SMSR] succeeded in attracting conservative institutional investors in a financing deal that closed last week, suggesting that XM is gaining respect in financial circles.

Less than one year ago, both XM and rival Sirius Satellite Radio [Nasdaq: SIRI] needed to dilute the value of shares held by their existing investors to entice new investors. The stock offering carried out by XM last week shows how risk-averse institutional investors are beginning to warm up to the company and its status as the U.S. satellite radio industry’s front runner.

XM successfully raised $150 million Sept. 10 when it sold 11.3 million shares of its common stock, priced at $13.25 each. The Baltimore-based buyers consisted of two business units of investment firm Legg Mason [NYSE: LM], as well as mutual fund company T. Rowe Price Associates.

XM was able to arrange the stock deal directly with the investment companies and sidestep millions of dollars in fees that an underwriter would have charged. The arrangement limited XM’s offering expenses to just $200,000 and produced $149.8 million in net proceeds.

Greg Cole, XM’s vice president and treasurer, said, “We as a company have been very fortunate to see a lot of interest from the long-term investment community in our stock. We are seeing a transition from the short-term hedge fund investors to the long-term investors.”

In its earliest days, XM needed to tap financing from sources that cater to high-risk, high-reward ventures. The transition to long-term investors has taken two years of solid operating results.

In recent months, XM officials have been aggressive in touting the company’s financial progress. With a track record of consistently meeting the guidance its offers to investors quarter-after-quarter, XM seemingly is winning the confidence of financial institutions that have money to commit.

“We are consistently out on the road marketing XM to the financial community,” Cole said. “A lot of folks have gotten to know our story.”

Legg Mason and T. Rowe Price also benefited by gaining the shares at a price 3 percent below XM’s closing stock price of $13.69 a share on Sept. 4 when the offering sale price of $13.25 was set.

The financing was needed by XM to address a shortfall in its funding caused by the faster-than-expected degradation of its two in-orbit satellites, XM Rock and XM Roll, both made by Boeing [NYSE: BA]. XM plans to launch the ground spare satellite called XM-3 in the fourth quarter. Despite the problems with Rock and Roll, XM has ordered from Boeing a replacement ground spare satellite, XM-4.

Last week’s financing could be used for construction of the XM-4 satellite, if insurance claims for the two deteriorating in-orbit satellites are not paid in a timely manner, according to financial documents XM filed last week with the Securities and Exchange Commission (SEC).

Tom Watts, a satellite analyst with SG Cowen, said the financing eliminates the “sole negative” on the XM investment story by wiping out a potential funding gap. Investors can now focus on XM’s expected strong subscriber growth during the upcoming holiday selling season.

Jimmy Schaeffler, a satellite analyst who heads The Carmel Group consulting firm, said XM’s recent financing should protect it from future fund raising worries until 2005, even if the insurance companies continue to deny XM’s claims.

The new funding comes from two well-respected firms that are not buying because they expect specific month-over-month subscriber growth, are not hedging their bets, and are not likely to sell their shares, Schaeffler said.

XM’s insurers recently denied its insurance claims for the two flawed in-orbit satellites, so the process of gaining compensation could be protracted. The insurers asserted that XM’s two in-orbit Boeing 702 model satellites currently are performing at adequate levels to sustain the company’s nationwide satellite radio service, according to XM’s SEC filings. In addition, the power trend lines of the satellites are not definitive, the insurers added.

–Paul Dykewicz

(Greg Cole, Chance Patterson, XM Satellite Radio, 202/380-4318; Tom Watts, SG Cowen, 212/278-4260; Jimmy Schaeffler, The Carmel Group, 831/643-2222)