SiriusXM: Is Pandora a Good Acquisition?
GuruFocus.com
September 28, 2018
- By Nicholas Kitonyi
SiriusXM Holdings Inc. (SIRI), the world's largest satellite radio company, announced Monday it is acquiring Pandora Media Inc. (NYSE:P) for $3.5 billion.
Since the announcement, analysts have been running the numbers to determine the company's premium valuation. Pandora has struggled to match the performance of its early days as a public company, which saw its stock price nearly quadruple between November 2012 and March 2014.
Pandora's stock has rallied 125% since bottoming in January, but, at just under $10 per share, it remains way off its 2014 highs of about $38 per share. At the current price, the market values the company at roughly $2.5 billion, which means SiriusXM will be paying a premium of 40%.
Pandora's downfall started in 2015 when Apple Inc. (AAPL) announced the launch of Apple Music. The company's top-line growth has since decelerated to the low single-digit level while the net loss has continued to widen.
So, in general, it would be correct to infer that Pandora was in trouble before SiriusXM came knocking. From a sum-of-the-parts perspective, this deal probably won't make sense to most investors. Therefore, the company likely has a plan that will generate synergies while it integrates Pandora into its business.
Pandora stands to benefit from SiriusXM's scale and financial resources while simultaneously leveraging on the satellite radio service's industry expertise. On the other hand, SiriusXM will gain more traction on mobile devices by leveraging Pandora's strength in this area. Pandora could also help SiriusXM enhance its digital presence and leverage its advertising capabilities.
During the conference call, management explained that merging the two technologies could take as long as six years.
While Pandora may only be bringing in just over $1.5 billion in revenue this year, SiriusXM will be looking to utilize some of its licensed and acquired technologies to improve its position in the audio entertainment industry. Pandora will also be bringing AdsWizz with it. AdsWizz provides programmatic audio advertising to advertisers and publishers, giving SiriusXM an interesting revenue stream to augment its subscription-based sales.
SiriusXM attracts potential customers with a trial period, after which some users subscribe to the premium service while others opt for alternatives. Those alternatives include Pandora, Spotify Technology SA (SPOT) and Apple Music, among others.
There are also reports that SiriusXM's parent Liberty Media Corp, which owns a sizeable stake in Live Nation Entertainment Inc. (LYV), could help the company acquire the Beverly Hills-based events promoter and entertainment company in an attempt to form what could be the world's largest audio entertainment company.
With Pandora already on board, analysts have pointed out that adding Live Nation to the portfolio could be what the company needs to complete the puzzle. Reports also indicate that Liberty Media and SiriusXM are trying to acquire a stake in iHeart Media, which is currently trying to maneuver through bankruptcy. It owns iHeartRadio, which is a free broadcast and internet radio platform headquartered in New York City.
Since Liberty Media owns a sizeable chunk of iHeart Media's debt, a takeover could happen, but this is still premature. Nonetheless, SiriusXM looks set to challenge the likes of Apple Music and Spotify as it continues to expand its addressable market while introducing new revenue streams. Buying Pandora could be just the beginning of a long string of acquisitions.
