Salomon Smith Barney Analysis

XM Satellite Radio [XMSR] appears to have obtained sufficient funds to operate through cash flow breakeven in late 2004 with a new financing totaling $450 million. The deal includes $200 million in new funds from strategic and financial investors and $250 million in payment deferrals and related credit facilities from General Motors [GM]. XM also is proposing to exchange its $325 million in senior 14 percent debt for $325 million in new 14 percent bonds that will save XM over $150 million in interest expense. However, the bonds will accrete to $475 million in value and include warrants and payment of a cash dividend at maturity.

The financing dilutes the ownership stake of current shareholders by 50 percent with the issuance of new stock and compares favorably with Sirius’ recently proposed recapitalization that dilutes shareholders to 8 percent of their current interest. However, we also note these transactions would leave XM with over $1 billion in convertible preferred equity. This contrasts to Sirius, which is expected to emerge from its restructuring virtually debt free.

The new financing would result in increased investment by several of XM’s strategic investors and important new investors including Hughes Electronics [GMH], The Hearst Corporation, Columbia Capital, AEA Investors, and Columbia. We are also pleased to see increased participation from Honda, whose total interest in the company is expected to rise to 8.3 percent from 2.3 percent. Honda also will assume a seat on the XM board.

We updated our financial model for XM Radio to reflect the company’s proposed financing. The dilution from the XM financing led to a lowering of our price target for the company to $4 from $5. While XM has consistently outperformed Sirius from an operational standpoint, we suspect that Sirius’ favorable capital structure may help it to recapture some lost ground. However, we are just glad to see both companies get financed.

Armand Musey is a satellite communications analyst at Salomon Smith Barney (“SSB”). Part of the information provided herein includes excerpts, abstracts, and other summary material derived from research reports or notes published by Armand Musey as a member of the Firm’s Global Equity Research Department. For a copy of the full research reports or notes or to view the research-report disclosure required by the NYSE and NASD rules relating to analyst independence and conflicts of interests, please visit http://www.ssbaccess.com or contact a SSB Financial Consultant. Valuation methodologies and associated risks pertaining to price targets, as well as other important disclosures, are contained in research reports and notes published on or after July 8. Salomon Smith Barney or its affiliates has received compensation for investment banking services provided within the last 12 months from XM Satellite Radio Inc..