It appears to be another one of those "need to make a deal at almost any cost" type of deal. Maybe a deal made in order to secure subscriptions to an earlier round of financing?
I think it is a predictable cost of getting started in the satellite radio business. You can't just walk into GM and say, hey, we want you to start installing our radios in your cars. Basically, XM had to agree to kickback money to GM to get them to commit to XM. I don't see these expenditures expenses that benefit the current period; they are, in fact, more appropriately expensed over a period of years, not unlike the cost of the satellites themselves. They are part of the cost of building a brand.
Like I said, the fact that GM is converting to debt is a big warning sign that things may not turn out as planned!
There is obviously more risk in lending money to XM than there would be in lending money to IBM. I don't view it as discretely as you do -- it isn't an "either/or", but more of a continuum -- you want as much security as you can get for whatever funds are advanced. That becomes more important as the risk of failure increases.
The non-secure payment obligation conversion solidifies that GM will have somewhere around 250 Million in unsecured debt claims if they (XMSR) happens to come up with the 200 Million in near-term funding. If not, expect GM to press the payment issue and possibly withdraw production plans, or step in with DIP financing.
XM Ownership:
Apollo Group Holdings 9.1%
Motient Corp. 5.8%
Clear Channel 8.5%
DIRECTV 6.6%
GM 5.6%
Madison Dearborn 5.2%
Columbia Capital 3.8%
Baron Capital 3.8%
AEA Investors 2.8%
Telcom Ventures 2.6%
Honda Motor Corp. 2.3%
Employees and Directors 4.5%
Public Investors 40%
1) GM stands to gain more by working with XM than by letting it go into bankruptcy, which will only serve to put the brakes on subscriber growth.
2) Clearly, there are other substantial organizations having sizable interests in XM; they aren't going to stand idly by while XM sinks; it simply isn't going to happen.
If this were SIRI, it would be different; but XM is executing perfectly, and it is fairly clear they will meet or beat their objective of cash flowing by 12/04 -- two years from now. Also, it is pretty clear that the $200-250M they are going for now is substantially all that will be required to get them to this point.
Do you see these other stockholders allowing this business to proceed into bankruptcy where they come away with zero? I don't think any of them would view it as "throwing good money after bad"... |
