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

SIRI can diversify while bolstering the business of P stock

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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.

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