SIRI Sirius XM Holdings Inc

By Anne Steele and Allison Prang 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 25, 2018).

Sirius XM Holdings Inc. agreed to buy online-music firm Pandora Media Inc. for $3 billion, as the satellite-radio company looks to add streaming services in the increasingly competitive fight for listeners.

The all-stock deal would create an audio-entertainment company with a market value of around $30 billion, rivaling music-streaming market leader Spotify Technology SA.

The deal is expected to help Sirius expand its offerings beyond cars, where most satellite-radio users listen, and to provide financial resources to Pandora as it tries to compete with on-demand music-streaming rivals like Spotify and Apple Music. Both companies are seeking to gain market share as listeners migrate from broadcast radio to digital and streaming options.

"This transaction is all about creating growth opportunities together that are not available to the separate companies," Sirius XM Chief Executive Jim Meyer said on a call Monday.

Pandora says it has 70 million monthly active users. SiriusXM has 36 million paying subscribers in the U.S. and Canada, plus some 23 million more annual trial listeners who get the service for a period for free when they buy a car.

The music business has changed radically in the decade since Spotify started letting users listen to any song they want whenever they want it, either for a flat monthly fee or in exchange for listening to ads.

Spotify and newer competitors such as Apple Inc.'s service have resuscitated record labels' fortunes by enticing fans to pay for music again, after sales were decimated by years of online piracy.

But those services have also posed a challenge for Pandora, which lets users create customized online radio stations based on their musical tastes; ad sales generate the bulk of the company's revenue. When it started in 2004, that approach represented a major advance compared with broadcast radio. But Spotify's on-demand service has stolen some of Pandora's thunder, and the company has been losing users while its advertising-centered business model has failed to generate profits. The company offers subscription options, but adoption has been slow and the company has indicated that it would return its focus to its advertising business.

Sirius XM, meanwhile, has enjoyed steady subscriber growth but lacks even the limited kind of custom options offered by Pandora. The two companies combined could seek to create a viable rival to Spotify and Apple Music.

But not everybody is convinced that the combination will be fruitful since few of Pandora's users are paying subscribers. "If you don't have a strong subscriber base, that's where all the value is, or the majority of it," says Eric Ross, chief strategist at Cascend Securities. "Without that, you're kind of sunk."

Mr. Meyer said the majority of people in trial ultimately decide not to pay for a subscription. The acquisition announced Monday, he added, gives Sirius the opportunity to refer tens of millions of users to Pandora's free, ad-supported radio offering.

"There's significant opportunity to cross-promote across two subscriber bases and take share -- you can guess where from -- from other audio platforms out there today," Mr. Meyer said.

"We do know that our customers stream quite a bit," Mr. Meyer said, adding that the two companies "complement each other as opposed to compete with each other."

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 this year, said the Consumer Technology Association, an industry group. Spotify is the global leader, with 83 million paying subscribers as of June, but Apple Music has been catching up to Spotify in the U.S.

Sirius XM, which has John Malone's Liberty Media Corp. as a controlling shareholder, already owns a part of Pandora.

Last year, Sirius paid $480 million for a roughly 19% stake in Pandora, helping the internet radio company shore up its balance sheet as consumers migrated to on-demand listening options. Soon after, Roger Lynch, formerly Sling TV's CEO, took the helm at Pandora. Since then, the company's stock has rebounded as the company put resources into enhancing its large ad-supported business and introduced more of its listeners to its own on-demand offering.

"We're in a great position now to compete with other services," Mr. Lynch said on the call. "The deal will improve our strong position as a streaming music company."

Mr. Meyer, when asked about opportunities to better negotiate with labels and other rights holders, said the two companies have "tremendous respect" for what artists bring to their models and would together in 2019 pay royalties approaching about $2 billion to various rightsholders.

"I think this merger will be good for everyone in music," he said. "If we are successful we will begin to shift share from channels that aren't paying performance rights."

Terrestrial radio broadcasters in the U.S. pay royalties to songwriters but not to performers or the record labels that control their sound recordings.

Pandora reported 74.7 million active users in 2017, nearly all of them listeners of its free service that lets users create custom radio stations based on their musical tastes, and plays ads, much like traditional commercial radio.

The number of users represented an 8.3% decline from a peak in 2014. The company added 351,000 paying subscribers for various ad-free offerings in the three months ended June 30 of this year, bringing its total to 6 million subscribers. Revenue increased 2.1% in the quarter to $384.8 million. The company, like other music-streaming peers, has never reported a profit.

Sirius said in 2017 that it had 32.7 million subscribers, a figure that has trended steadily upward for several years. The company reported $1.14 billion in subscriber revenue during the most recent quarter, up 2.5% from the comparable quarter a year ago. Total revenue rose 6.3% to $1.43 billion, and Sirius reported net income of $292.4 million, up 45%.

Under the deal -- which the companies valued at $3.5 billion, including debt -- Pandora shareholders would swap each share for 1.44 newly issued shares of Sirius XM.

Sirius's already thin deal premium -- 11% over Pandora's Friday closing price -- became slimmer as investors reacted to the news Monday. Sirius XM shares slid 9% to $6.36 in afternoon trading. At that level, the deal would value Pandora at about $9.16 a share, just 7 cents more than the stock was worth Friday. Pandora's shares traded flat at $9.09 Monday.

The deal has a "go-shop" provision, which allows Pandora and its board to talk with other parties about doing a different deal. Mr. Lynch said the go-shop period was an important component of the negotiation for Pandora's board, but Raymond James analyst Justin Patterson said in a note the relatively modest premium reflects Sirius's confidence that it is the primary bidder for Pandora.

Finding a second bidder will come down to another buyer's interest in Pandora's audio advertising technology.

Assuming no other bids, the companies expect the deal to close by April. Pandora shareholders would hold about 8.6% of the combined company.

Sirius XM also reiterated its financial guidance for the year, while Pandora backed its third-quarter outlook.

Corrections & Amplifications Pandora had $250.3 million in net long-term debt and $505.7 million in redeemable convertible preferred stock as of its most recent quarterly filing. An earlier version of this article incorrectly stated it had $273 million in long-term debt and $490.8 million in redeemable convertible preferred stock.

Write to Anne Steele at Anne.Steele@wsj.com and Allison Prang at allison.prang@wsj.com

(END) Dow Jones Newswires

September 25, 2018 02:47 ET (06:47 GMT)

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