One of this year's best comeback stories is falling into the arms of its most logical partner. Pandora (NYSE: P) is being acquired by Sirius XM Radio (NASDAQ: SIRI) in an all-stock deal that is currently valued at roughly $3.5 billion. Pandora investors will receive 1.44 newly issued shares of Sirius XM for every share they presently own. Sirius XM closed at $6.98 on Friday, translating into a buyout price of $10.05 per share.
The pairing isn't a surprise. Sirius XM was the only major company that was vocal about its pursuit of Pandora when it was on the block two years ago, settling for a minority stake when the two parties couldn't come to an agreeable takeout price. Let's go over a couple of the reasons why this is a great deal for Pandora and Sirius XM investors.
1. The pieces fit
Growth is decelerating at Sirius XM as it stretches the upper band of its addressable market. Pandora is struggling to keep up with the two larger premium music subscription services. Each company can make the other company stronger.
Pandora will be able to take advantage of Sirius XM's financial stability, as the satellite radio giant is consistently profitable and cranks out a ton of free cash flow. Sirius XM can also use its star power and scale to provide Pandora with exclusive content to make it stand out from rival streaming services.
Sirius XM also has plenty to gain. Pandora has a much deeper mobile presence than Sirius XM, as the satellite radio service is consumed mostly by drivers through factory-installed receivers. Pandora also brings digital marketing capabilities and years of online listener behavior data, putting Sirius XM in a better position to succeed in a niche where it has stumbled in the past.
2. The all-stock deal won't slow Sirius XM
Sirius XM is a beast. It expects to generate $2.175 billion in adjusted EBITDA and about $1.5 billion in free cash flow this year.
With churn near historical lows, Sirius XM has a seemingly captive audience bankrolling its ability to go shopping for complementary pieces on an all-cash basis. However, with this agreement bubbling up as an all-stock deal, it won't get in the way of Sirius XM's leveraged balance sheet. Sirius XM won't have to physically pay roughly two years' worth of free cash flow to get the deal done, giving it more flexibility to keep adding to its roster in the future.
3. Sirius XM already has 15% of Pandora
Sirius XM acquired convertible preferred stock in Pandora during last year's transaction, giving it a roughly 15% stake on an as-converted basis. In other words, Sirius XM just has to issue new stock to cover the 85% of Pandora it doesn't presently own.
This is a great deal. The two companies don't need each other, but they do fill each other's void. Sirius XM isn't buying quicksand. Pandora's active listener base may have declined from 76 million to 71.4 million over the past year, but adjusted revenue rose 12% in its latest quarter as it gained ground in premium streaming subscriptions and advertising -- and that's just the two areas where Sirius XM can use a little help.
"Now that streaming stocks in general and Pandora in particular are hot again, it wouldn't be a surprise if Sirius XM or any tech giant wanting an audience of more than 70 million streaming accounts snaps up Pandora," I wrote two weeks ago.
Nailed it, I guess.
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