Sirius XM (SIRI) finished Monday's trading down a stunning 10.3% at $6.26 as investors found the satellite-radio giant's $3.5 billion deal to buy streaming-music provider Pandora Media (P) to be full of static. Pandora also fell 1.1% to close at $8.98 after rising nearly 3% earlier in the session.
Sirius announced plans Monday before the bell to buy Pandora under a stock swap that would give investors 1.44 Sirius shares for each Pandora share held. That represented a 13.8% premium over Pandora's closing price Friday, but Monday's plunge erased all of that and more.
One aspect of the deal that might be worrying investors is Pandora's lack of profitability. After all, the streaming-music firm has yet to turn a profit.
"Since our inception in 2000, we have incurred significant net operating losses and, as of Dec. 31, 2017, we had an accumulated deficit of $1.3 billion," Pandora reported in its latest 10-K filing, blaming its debt on the cost of acquiring other companies in the industry. Pandora remains deeply in debt despite a a deal last year in which Sirius bought a 15% in the company for $480 million in cash.
Still, Sirius lauded Monday's deal as a way to "funnel" users from Pandora's 60 million+ user base to the paid services that Sirius offers, while further moving SIRI's business beyond its core in-car listening.
"The addition of Pandora diversifies our revenue streams with the United States' largest ad-supported digital audio offering," Sirius CEO Jim Meyer said in the analyst presentation Monday morning. "It broadens our technical capabilities and represents an exciting next step in our efforts to expand our reach beyond the car."
He also said adding Pandora to Sirius' business should help funnel more users from free services to paid programs. "As I've said many times, we would benefit from having a 'pre-funnel,'" Meyer said. "When this transaction closes, we will have a scale-engage user base of 65 million people who listen monthly to free ad-supported digital radio."
The CEO explained that this is preferable to the free-trial method that Sirius has employed in the past, as that's been ineffective. "While we love our new- and used-car conversion rates, the truth is the majority of trial-ers decide not to pay for our service," Meyer said.
But skepticism remains on whether this new funnel will be any more effective than Sirius' existing customer-acquisition efforts. As one tech journalist put it:
Wow. SiriusXM is buying Pandora for $3.5bn. When I looked at Pandora's numbers a while back - just out of interest - I was amazed that a company that size could lose $1bn in 4yrs and still be in business.— Charles Arthur (@charlesarthur) September 24, 2018
This is the same price as SiriusXM bid in summer 2016. So 2yr of nothing.
Sirius shareholders are also likely perturbed because SIRI is already dealing with significant debt of its own even without adding Pandora's obligations. Sirius disclosed in January that the company already had $6.8 billion of debt itself as of Dec 31.
Another interesting wrinkle in the deal is that it gives more power to Pandora than Sirius. That's because terms give Pandora the right to consider rival offers ahead of the deal's closure, which is expected early next year.
"The merger agreement provides for a 'go-shop' provision under which Pandora and its board of directors may actively solicit, receive, evaluate and potentially enter negotiations with parties that offer alternative proposals following the execution date of the definitive agreement," the agreement's fine print reads. "There can be no assurance this process will result in a superior proposal."
The Bottom Line
Many market watchers realize that Sirius needs to branch beyond its current car-radio format, as consumer trends point firmly to streaming audio as the wave of the future. U.S. streaming services generated $5.7 billion in revenue in 2017, up from just $500 million in 2010.
Buying Pandora will definitely make Sirius a player in that market, but with competitors like Spotify (SPOT) , Amazon (AMZN) and Apple (AAPL) already controlling the lion's share of the streaming market, Wall Street seems unimpressed with Monday's deal.
Ross Gerber, a California-based investment adviser, was uncertain about the deal and its ability to impact Sirius' business:
Only time will tell if the uphill battle that SIRI is choosing to entrench itself into will pay off, if it does indeed close. What's for sure is that the market isn't impressed so far.
(This column has been updated with closing stock prices and other details.)