By Carlos Asorey, Angela Gladkikh, Steven Skorma (Georgetown University) - Date: 20/01/2018
Overview of the deal
Acquirer: Sirius XM Holdings Inc.
Target: Pandora Media, Inc.
Estimated value: $3.5bn
Announcement date: 9/24//2018
Acquirer Advisors: Allen & Company, BofA Merrill Lynch
Target Advisors: Centerview Partners, LionTree Advisors, Morgan Stanley
On September 24, Sirius XM announced the all-stock acquisition of Pandora for approximately $3.5 billion. Under the following agreement, the owners of outstanding shares in Pandora will receive a fixed exchange ratio of 1.44 newly issued Sirius XM shares for each share of Pandora they hold. The implied premium of the transaction is approximately 13.8%. Sirius XM already controls 15% of Pandora and the acquisition allows for further industry consolidation as streaming services compete for business and subscribers.
While the transaction has been approved by the management teams of both companies, the acquisition is expected to close in the first quarter of 2019, following the necessary shareholder and regulatory approvals. The transaction sets to create the world’s largest audio entertainment company with more than $7 billion pro forma revenues and strong long-term growth prospects.
“This is great for SiriusXM on multiple levels. First of all, it gets Pandora’s 70 million-plus users (SiriusXM has 36 million) along with their data and credit card info. What’s better is that it appears that there’s little overlap between the audiences. What’s better than tripling your audience in one fell swoop? Second, it provides online streaming for SiriusXM that it didn’t have before. Yes, Sirius has a streaming component, but it’s tiny compared with what Pandoa brings to the table. Sirius really needed a more visible online presence, and now it has it. -Bobby Owsinski, Forbes
Company details (Sirius XM Holdings Inc.)
Sirius XM is one of the largest radio companies in the world and provides services and products like commercial-free music, news, sports and talk programming. Widely available almost in every vehicle, SiriusXM also serves as a provider of connected vehicles services.
- Founded in 1990, headquartered in New York, US
- CEO: James Meyer - President: Scott Greenstein
- Number of employees: 2,575
- Market Cap: $28.0bn - EV: $32.5bn
- LTM Revenue: $5.7bn - LTM EBITDA: $2.1bn
- LTM EV/Revenue: 5.7x - LTM EV/EBITDA: 15.7x
Company details (Pandora Media, Inc.)
Pandora is an international music discovery platform that offers radio and on-demand music streaming. Striving to connect artists and their audience, its proprietary tool, Music Genome Project, tailors hours of customizable music to the taste of each individual listener.
- Founded in 2000, headquartered in Oakland, US
- Chairman: Gregory Maffei - President and CEO: Roger Lynch
- Number of employees: 1,938
- Market Cap: $2.3bn - EV: $2.7bn
- LTM Revenue: $1.5bn - LTM EBITDA: -$0.3bn
- LTM EV/Revenue: 1.7x - LTM EV/EBITDA: N/M
Projections and Assumptions
Short term consequences
Following the completion of the acquisition, Pandora shareholders will receive 1.44 shares of newly issued SiriusXM stock granting them an 8.6% stake in the combined entity. Immediately following the announcement Pandora shares rose 8.58% to $10.65 in pre-market trading, representing a positive initial reaction to the deal for Pandora investors. However, Sirius XM shares fell 1.29% to $6.89, likely stemming from Pandora’s recent revenue losses: in the first half of 2018 alone, Pandora lost over $200 million in revenue.
The acquisition, however, represents a combined $7 bn in pro-forma revenue in 2018 and will make SiriusXM the world’s largest audio entertainment company by adding Pandora’s 70 million US users to their current 36 million US subscribers once the transaction is completed. This combined entity would create the world’s largest audio entertainment service with over 100 million users compared to the next leading competitor, Spotify, which only holds 75 million active subscribers. Overall, this is beneficial for both parties as music-streaming services have been growing in recent years, and U.S. consumer spending in that area is expected to jump 29% to $6.6 billion in 2019. SiriusXM hopes to capitalize on this growth and expects large revenue growth in coming years.
Audio entertainment consumers will likely experience few changes as a result of the acquisition. SiriusXM hopes to create unique audio packages through cross promoting the two services such as driving in-car listening for Pandora. Through cross-promoting, SiriusXM could offer listeners bundle combinations of SiriusXM and Pandora premium products.
Long term upsides
For SiriusXM, the acquisition of Pandora represents a significant move beyond merely automotive radio into a larger home and media music streaming presence. Streaming services such as Pandora, Apple Music, and Spotify accounted for over 75% of the music industry’s revenue in 2018 and SiriusXM, a satellite radio platform, is looking to take advantage of this emerging streaming presence through expanding platforms such as Pandora. However, Pandora has struggled to compete with larger competitors like Spotify, Apple Music, YouTube, and Amazon in recent years. They have consistently reported revenue losses as a result of having to pay higher royalty rates and copyright fees to record labels than other on-demand services. This is due to a 2015 ruling by the Copyright Royalty Board mandating online radio stations must pay 17 cents per 100 song plays by non-subscribers and 22 cents per 100 plays by subscribers. While this poses a potential long-term threat to Pandora’s profitability, many analysts agree that the large scale of SiriusXM will allow them to easily withstand Pandora’s losses and even generate future growth and profitability. This large scale can help create bargaining power which SiriusXM can use to lower Pandora’s high royalty rates and increase revenues.
If able to do so, Pandora would be able to create more serious competition against the larger streaming services and SiriusXM will be able to establish a more modern digital presence than they currently hold. SiriusXM hopes to achieve this through continued investments in content, technology, and innovation outside of automotive vehicles. Additionally, the combined entity could generate interest among competitors to seek inorganic growth in order to compete with SiriusXM’s large subscriber base.
Risks and Uncertainties
The deal is expected to go through during the first quarter of 2019 without any glaring risks or uncertainties. Definitive filings with the SEC were completed in December of 2018, and regulatory approval was expected as the merger would enhance SiriusXM’s position in competing with other major music providers. Furthermore, the acquisition has already unanimously passed SiriusXM’s board and the directors of Pandora. All that awaits is the approval of Pandora’s stockholders in early 2019.
In terms of execution, most sources agree that the deal runs little execution risk relative to other transactions and there is strong confidence in SiriusXM’s ability to deliver positive results. Nonetheless, while there seems to be overall optimism in the record label industry, some point to the possible risk of an emerging music giant: Liberty Media, which has significant stakes in SiriusXM and Live Nation (a company that focuses on live music events) would potentially be able to combine all three companies and gain very strong bargaining position over record labels and other companies in the industry.
Finally, questions remain about the future strategy regarding individual offerings of both companies and the consolidation of revenue streams. Depending on whether SiriusXM prefers to focus its attention on paid subscriptions, advertising revenue, or a combination of both, consumers may be more or less inclined to use the service.
I’m really looking forward to being able to cross-promote to Pandora’s free users a better premium-subscription opportunity, whether that’s the full SiriusXM bundle or some combination of the SiriusXM bundle and Pandora premium products… I want anybody who comes through a subscription trial with either SiriusXM or Pandora to be using a service that we’re monetizing either SiriusXM or Pandora to be using a service that we’re monetizing either through subscription or advertizing. -Jim Meyer, CEO of SiriusXM
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