The Sirius XM Holdings Inc. (SIRI)-Pandora Media Inc. (P) Deal Makes Sense for Both

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Shares of Pandora Media Inc. (NYSE:P) soared 15.8% on Friday when it emerged that Sirius XM Holdings Inc. (NASDAQ:SIRI) Chairman Greg Maffei expressed interest in acquiring Pandora. Sirius approached Pandora earlier this year, offering $15 a share, but Pandora turned SIRI down. Hopefully they will succeed this time, since the deal will benefit both parties.

Pandora stock now is up 2.8% for this year; it had been lagging recently until news of the offer broke, bringing Pandora stock into positive territory for the year.

The market showed less confidence in SIRI stock, up 11.8% year-to-date and currently trading at 35 times earnings. But on Friday, Sirius opened at $4.53 and closed at $4.30, losing 5% of its market cap.

This merger should strengthen Sirius’s position in the future, and SIRI stock will recover.

Analysts greeted news of the coming merger favorably. RBC analyst Mark Mahaney agreed that merging Pandora, which derives revenue from ads, with subscription-based Sirius, makes sense. By diversifying the customer base and revenue streams, the combined entity will see reduced risk.

Macquarie analyst Amy Yong wrote that buying Pandora would give Sirius a better digital strategy and “future-proof” SIRI stock, raising SIRI’s multiple.

How Sirius (SIRI) Gains by Merging With Pandora (P)

Both Sirius and Pandora have their problems. An Investopedia article in 2015 summarized this:

“The knock on Sirius XM is that it’s a transitory technology, facing obsolescence as connected cars and smartphone-tethered listeners open up the realm of free or cheaper radio entertainment. The knock on Pandora is that it will be replaced by the tech giants that have made digital radio the new battleground as iOS and Android battle for mobile supremacy.”

Satellite radio may be nearing obsolescence, as in-car Wi-Fi and 4G LTE data plans let people stream music while they drive. As James Brumley notes, mobile data plans charge $10 per gigabyte, enough for 200 songs or 10 hours of audio.

SIRI’s XM All-Access costs $19.99 a month, and subscribers might question the value of this when they already have mobile phones.

Technological change may not threaten SIRI stock in the near-term, as Sirius XM added 345,000 subscribers during the third quarter of 2016. Nonetheless, SIRI is hedging, launching Sirius XM Connected Vehicle Services in 2013. The Sirius XM Guardian offers features such as vehicle finder, roadside assist calls, SOS and theft alarm notification.

Buying Pandora will not only help Sirius hedge against change, but also give it some tech expertise. It also gains a large user base, with Pandora boasting 78 million monthly listeners. SIRI stock will also be able to offer Pandora’s Ticketfly services to its 30 million subscribers.

How Pandora Benefits by Teaming with SIRI

Pandora faces a great deal of competition. Music streaming players are fighting over market share, with few seeing profits. Pandora competes with pure-play streaming such as Spotify, SoundCloud, iHeartMedia Inc (OTCMKTS:IHRT) and Vevo. If that weren’t enough, tech giants with deep pockets are bankrolling their own services. Amazon.com, Inc. (NASDAQ:AMZN) offers Amazon Music Unlimited in addition to Prime Music. Apple Inc. (NASDAQ:AAPL) started Apple Music last year. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) offers Google Play Music and YouTube Music.

YouTube Music offers music streaming with ads, or ad-free for YouTube Red subscribers.

Independent streaming services such as Spotify rarely see profits, while tech giants such as Amazon and Apple can afford to burn cash for a while to support their offerings. Pandora’s staying power is limited, and many see a buyout as inevitable. With net income of over $509 million in 2015, SIRI can absorb Pandora’s losses for a while. This should pay off eventually, as Pandora aims for $4 billion a year in revenue by 2020, with 15% operating margins.

Conclusion

This deal makes sense, if SIRI can avoid overpaying for Pandora. On Dec. 7, it emerged that Pandora was looking for other potential buyers.

With other buyers in play, SIRI might get caught in a bidding war. Analysts have upgraded Pandora stock, with Oppenheimer analyst Jason Helfstein estimating the final price at $18 to $21 a share.

If all goes well, Pandora shareholders will receive a fair price and Sirius will gain the chance to diversify and expand its business.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/12/sirius-xm-holdings-inc-siri-pandora-media-inc-p-stock/.

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