With contributions from Nicholas Stiege – One of our top picks, Pandora, saw its share price rise, post an all-stock offer from SiriusXM for $10.14 a share. Including the 10.3% price drop of SiriusXM, the offer represents a takeover price of $9.19, slightly above the $8.98 September 24th closing price, but materially below what we believe Pandora’s fair market price is ($13). It appears the market does not believe another bid is coming.
Chairman of both SiriusXM and Pandora Greg Maffei and his two SiriusXM board members at Pandora have voted for a deal that we do not believe is fair to Pandora’s shareholders. Our gross margin and customer lifetime value added valuation metrics versus Spotify’s share price would equate to a $128/share offer for Spotify (currently trading at $177/share).
http://investor.siriusxm.com/investor-overview/press-releases/press-release-details/2018/SiriusXM-to-Acquire-Pandora-Creating-Worlds-Largest-Audio-Entertainment-Company/default.aspx
Unlikely companies to attempt a bid:
Tencent Music (board ties to Spotify)
Spotify (SPOT-NYSE) – Cash flow issues and few product synergies
Apple (AAPL-NASDAQ) – Have their own, well-developed platform with Apple Music.
Amazon (AMZN-NASDAQ) with their own platforms are less likely to come in with a higher bid.
Disney (DIS-NYSE) – Has a package that bundles Hulu with Spotify. Unlikely to attempt a big acquisition in Pandora.
Being a U.S. centric platform, we believe Pandora makes more sense with a vertically integrated U.S. operator such as an AT&T (T-NYSE), Comcast (CMCSA-NASDAQ) or a similar type of company. However, it may make more sense for these conglomerates to do a partnership. The big issue might be that Pandora still relies heavily on its ad revenue rather than monthly subscribers.
We believe investors in Pandora should not sell their shares. While there is a small chance another offer comes in, we believe the shares are undervalued and that shareholders can hold out for a small chance that another offer comes through closer to our $13 target price. At the worst, we would wait until the expected closing in Q1 2019.
Media Comparables – Prices Updated for the September 24, 2018 Close
Source: Perspectec
Pandora Media (P-NYSE)
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