After taking a 15% stake in the struggling streaming music company last year, Sirius XM (NASDAQ:SIRI) announced an agreement to acquire Pandora (NYSE:P) yesterday. The result would be the world’s largest audio entertainment company, but it would put Sirius in direct competition with streaming music leaders Spotify (NYSE:SPOT) and Apple (NASDAQ:AAPL) Music. Market reaction to the planned $3.5 billion deal was far from positive, with Sirius stock closing down over 10% — its biggest loss in more than seven years. In today’s trading, SIRI stock remained flat.
Sirius XM Announces Plan to Acquire Pandora
Yesterday, Sirius announced it was planning to buy streaming music service Pandora in a deal that would be worth approximately $3.5 billion.
Sirius currently has approximately 33 million paid subscribers, while Pandora counts 6 million paid and roughly 65 million free, ad-supported customers. Combined the two would form the world’s biggest audio entertainment company.
According to Bloomberg, the deal is expected to close in Q1 2019, but the terms allow Pandora to shop for a better offer. If the planned acquisition falls through, Sirius stands to collect between $52.5 million and $105 million from Pandora. Since the announcement, Sirius stock has suffered a 10.17% drop, while P is down less than 1%.
What’s the Plan?
According to Sirius, nothing much is expected to change for the two companies, at least in the short term. In its announcement of the deal, Sirius noted:
“Together, we will deliver even more of the best content on radio to our passionate and loyal listeners, and attract new listeners, across our two platforms. For now, there are no immediate changes to SiriusXM or Pandora content offerings in connection with this announcement. The combined company will benefit listeners and artists by growing two vibrant platforms that will provide the best, most compelling audio to more listeners.”
While details are thin, it’s clear that Sirius wants Pandora to help take on Spotify and Apple Music, both of which are adding new subscribers at a rapid rate.
Why Did Sirius Stock Drop?
Pandora is one of the oldest streaming music services and an internet radio pioneer. It has a total of over 71 million active users — which sounds impressive, but the vast majority of those are listening to Pandora’s free, ad-supported version. And those ads aren’t paying the bills. Pandora has been losing money for years and P is down over 75% since its 2014 heights. It made our 2017 list of “Tech Stocks That Will Disappear by 2027” and with the Sirius acquisition, it looks as though that prediction will prove correct — even sooner than expected.
So why did Sirius stock drop on the announcement? It’s not entirely clear what the satellite radio company gets out of buying Pandora. Yes, it will now have a streaming music service of its own to compete with Spotify and Apple Music. That’s an important win with streaming music services increasingly pushing into vehicles, which is the primary stronghold for Sirius XM. With Pandora, the company gets a mature platform with an established listener base.
But Pandora is looked at by many in the industry as being in trouble. It has relatively few paid subscribers and it’s losing users to Spotify, Apple Music and Amazon’s (NASDAQ:AMZN) streaming music services.
It’s possible Sirius will find a way to turn Pandora around. It’s been suggested that with new ownership, the company could be in a stronger position to renegotiate royalty rates with music labels for more favorable terms. Sirius could also offer some combined packages, positioning itself as the premium, ad-free music service for your car that also offers a compelling streaming music platform for everywhere else, instead of also paying for Spotify.
Whatever the ultimate strategy is, Bloomberg says Sirius and Spotify execs were vague about it during a call announcing the deal. And with Sirius stock down double digits on the news, it’s clear SIRI investors aren’t sold on the idea.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.