MLB squeeze play has XM sweating

Analysts wary as 2004 content deal rears its head

It could be that one of XM's earliest and costliest content deals is coming back to haunt shareholders.

According to a recent regulatory filing, XM is struggling to maintain a required $120 million escrow account for the benefit of Major League Baseball. The revelation has at least one Wall Street analyst concerned that XM might choose to issue more stock, a dilution that would hurt existing shareholders.

XM announced its MLB deal Oct. 19, 2004, when Wall Street was giddy about rapid subscriber growth and not too concerned about XM's balance sheet. At the time, XM shares were at $29.05, and they rose steadily for the next three weeks. Shareholders, in fact, were treated to a 25% gain in less than a month, courtesy in large part of the MLB deal.

But that arrangement is costing XM $650 million over 11 years. And, while the $120 million escrow account isn't new since then, tighter capital markets and XM's dwindling cash are.

XM said in its filing that a surety bond for MLB's escrow set for expiration June 30 was replaced, in part, with $62.5 million available under a revolving credit facility. It added, "We are continuing to have discussions with MLB about this escrow and related matters, and there may be further developments."

Whatever those developments might be, Goldman Sachs analyst Mark Wienkes is guessing that they might not amount to enough to avoid issuing shares, thus the "risk of material equity dilution."

The analyst told clients last week to sell their XM shares as well as those of its hopeful merger partner, Sirius Satellite Radio. Together, he said, they might need to raise $500 million-$1 billion in additional capital by early next year.

Even hefty benefits from the merger, if approved, won't come quickly enough. Wienkes suspects that XM's cash balance will go from about $53 million now to negative $129 million in the first quarter, while Sirius goes from $133 million to negative $115 million in the same frame.

Shares of XM closed Friday at $11.02, and Sirius shares were at $2.59. Wienkes thinks XM is headed for a modest rise to $11.50 in the next 12 months, while Sirius figures to sink to $2.25.

XM's funding of the $120 million MLB escrow, he said, "exacerbates the cash flow situation, particularly given the already declining cash cushions and debt maturities in 2009 that will need refinancing."

This isn't the first time expensive content deals led to controversy. Two years ago, an XM board member, Pierce Roberts, resigned over XM's spending habits, arguing that the company should focus more on cash flow and less on growth. Roberts said then that he saw "a significant chance of a crisis on the horizon" if XM didn't rein in spending.

His resignation was announced in February 2006, one week after XM announced a $55 million deal to bring Oprah Winfrey aboard for three years. XM hasn't struck a big-ticket content deal since.