Reality May Be Catching Up With Satellite Radio Hype

XM's largest shareholders were also its two largest potential customers: Honda Motor(HMC Quote), with a 22% stake, and General Motors(GM Quote), with a 13% stake. Neither automaker had managed to excite potential car buyers with cool new vehicles in years, and both were hoping to use factory-installed satellite radio in the 2003-2004 model years as a marketing ploy to entice incremental new sales. Yet, even as each company was announcing the names of up to 30 high-end models that would offer the service in 2003, XM's financial condition was worsening. On Nov. 15, shares fell to an all-time low when XM reported a wider-than-expected third-quarter loss and it needed to restructure at least $200 million in debt owed to GM.

At that moment of critical need, XM executives pulled one of the boldest David-and-Goliath moves in recent financial history, telling General Motors to put up or shut up: Defer payments, or see their already-advertised-and-sold service disappear down a rat hole called Chapter 11. The ultimatum worked, as the tiny company persuaded the giant automaker to give it $450 million in financing ($200 million in new funds and $250 million in payment deferrals) in exchange for notes that converted into common stock at $3.18 a share, almost double the price at the time.

Shares have since gradually advanced almost 500% from the low, as they now trade around $10. The service itself launched recently to much acclaim, and inexpensive, beautifully designed home versions of the radio system (called SkyFi) are one of the coolest consumer electronics items available in stores today. Virtually every week, major new vendors such as Wal-Mart Stores(WMT Quote), Toyota(TM Quote) Acura, Audi and Avis are announced. A few days ago, the company confirmed it was on track for sales of $85 million in 2003 -- up from $800,000 in fiscal 2001 and $20 million in fiscal 2002.

But that's not the end of the story, as Sirius was facing its own demons up until a few days ago. After XM managed to get its creditors to trade debt for equity last year, Sirius figured it was worth a shot as well -- and in early March announced that 90% of its creditors had agreed to exchange $635.7 million in debt for 545 million shares of newly issued stock plus $200 million in new funds. In a pattern identical to the one that played out at XM, shares then declined for a few days to an ultimate low around 40 cents before weary, shell-shocked investors gradually began to lift the price toward a buck.