May 12 (Bloomberg) -- XM Satellite Radio Holdings Inc., the pay-radio company planning to combine with smaller competitor Sirius Satellite Radio Inc., reported a wider first-quarter loss as it increased spending to attract more subscribers.

The net loss expanded to $129.3 million, or 42 cents a share, from $122.4 million, or 40 cents, a year earlier, the Washington-based company said today in a statement. Sales rose 17 percent to $308.5 million, missing the $313.3 million average of 12 analysts' estimates compiled by Bloomberg.

XM spent more on marketing to win subscriptions from new car buyers. The company is retaining more customers after a free introductory period and is putting its radios into a bigger variety of vehicle models, April Horace, an analyst at Janco Partners in Greenwood Village, Colorado, said in an interview.

``I'm very encouraged,'' said Horace, who doesn't own the shares and recommends investors buy them for their above-average growth potential.

XM rose 50 cents, or 4.2 percent, to $12.30 at 4:30 p.m. New York time in Nasdaq Stock Market trading. The shares have dropped 12 percent since New York-based Sirius agreed to buy the company on Feb. 19, 2007. Sirius, down 22 percent since then, gained 14 cents to $2.87.

XM said it remains hopeful about the combination. The $4.18 billion deal won clearance from U.S. antitrust officials in March and is pending a Federal Communications Commission ruling. Sirius is offering 4.6 of its shares for each of XM's.

Subscriber Growth

XM added 355,000 subscribers through sales to new car buyers and rental companies in the first quarter, up from 225,000 a year earlier. Subsidy and distribution costs rose 64 percent to $71.5 million as the company paid more to have its radios installed in new cars.

``New car consumer adoption of satellite radio remains a strong growth platform,'' Chief Executive Officer Nate Davis said on a conference call.

XM gained a net 303,000 subscribers in the quarter, or 6 percent more than a year earlier. It ended the quarter with 9.3 million, a gain of 18 percent.

The company lost 51,000 customers who bought equipment in stores or online, compared with a gain of 60,000 a year earlier.

Retail sales are likely to be ``soft'' until consumer confusion over the possible merger is resolved, Horace said.

Cancellations

Churn, which measures how many people canceled their subscriptions, dropped to 1.77 percent from 1.78 percent a year earlier. XM's retention, the indicator of those who subscribe after a free trial period ends, rose to 53.3 percent from 51.5 percent.

Sirius and XM, the only two pay-radio companies, have said their combination is justified because they compete in a broader audio entertainment market that includes iPods, free radio and Internet broadcasting. The companies proposed lower-priced packages of programming to consumers to win the FCC's approval.

XM, whose programs feature Bob Dylan, Oprah Winfrey and Major League Baseball, charges $12.95 per month, a cost that drops as low as $9.99 a month with longer subscriptions

(The company held a conference call at 10 a.m. New York time. To listen to a replay, http://www.xmradio.com/ and click on ``Investor Info'' link.)

To contact the reporter on this story: Todd Shields in Washington at tshields3@bloomberg.net

Last Updated: May 12, 2008 16:40 EDT