Is SiriusXM Paying The Right Price For Pandora?

SiriusXM (NASDAQ: SIRI) recently announced an agreement to acquire Pandora (NASDAQ: P) in an all-stock deal for $3.5 billion. This deal, expected to close in the first half of FY 2019, would make the combined entity the world’s largest audio entertainment company. Further, it would give the satellite radio company entry into the well established media streaming market. The merger could unlock music streaming services for cars and should bring together SiriusXM’s roughly 36 million subscribers and Pandora’s nearly 75 million monthly active users – the largest digital audio audience in the U.S. This deal holds great potential for both companies as it could bolster their positions in segments where they are currently lacking. Pandora’s technological competence should help SiriusXM expand beyond vehicles and streamline its features like personalized recommendations. Concurrently, SiriusXM alliance with several automakers should accelerate Pandora’s distribution to vehicles and unlock music streaming services for automobiles.

Our valuation dashboard suggests that SiriusXM is offering an attractive price from Pandora’s standpoint, despite the growth potential of Pandora and the likelihood of realizing synergies. We have an $8 price estimate for Pandora, which is lower than the current market price. Our various assumptions can be seen and modified on our interactive dashboard Is SiriusXM paying the right price for Pandora? Users can gauge the impact of changes on the earnings and valuation of the company.

Reasons For The Acquisition

1. Subscriber Growth:  Pandora remains optimistic about further expanding its subscriber base, driven by podcast services, more device partnerships, multiple digital partnerships with AT&T, Snap, Cheddar, and T-Mobile, and increased music consumption. The AT&T deal, which bundles Pandora Premium with AT&T’s unlimited data plan, should boost its subscriber base and add significant value to the top line in the near term. Further, Pandora expects this partnership to provide subscribers with a higher lifetime value as a result of lower churn and lower acquisition costs.  However, the Snap partnership is unlikely to add significant value to the top line in 2018. The deal, over the long run, could boost ad revenues and could potentially boost Pandora’s paying subscribers, but is unlikely to move the needle much in the immediate term.
2. Audio Partnerships: The company’s recently concluded acquisition of AdsWizz – a digital audio ad tech company – which should likely improve its advertising capabilities and expand its addressable market. This should help draw more advertisers to the digital audio space. Given the fact that audio is the fastest growing format in digital advertising, the deal makes sense for Pandora. Furthermore, it is expected to be accretive to its earnings as it should help them generate higher revenues from free listeners and should provide decent medium-term growth opportunities.
3. Co-marketing Partnerships: Its co-marketing partnership with Cheddar should give Pandora access to a host of young subscribers. This should drive subscription trials for Pandora.

As a result of this merger, the combined monthly active users, subscribers, and trial listeners would represent the largest digital audience in the U.S. Further, SiriusXM’s considerable automobile relationships should aid Pandora’s expansion into cars, while Pandora’s technical advancements should further streamline its features – enabling it to create unique audio packages. Despite the lofty valuation, the deal looks to be a win-win for both parties involved, as a number of synergy opportunities exist given the complementary offerings.

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