7 Reasons Sirius XM Should Buy Pandora

Sirius XM Radio (NASDAQ: SIRI  ) didn't leave a lot of doubt about its reason for initiating a $1.25 billion revolving credit facility last week. An ambitious share buyback and a small year-end distribution will more than eat up the new money being raised.

That's fair. The satellite radio provider had mentioned repurchases and payouts as two of three possible uses. It also mentioned acquisitions, but CEO Mel Karmazin has often lamented that there isn't anything out there worth buying.

Well, how about Pandora (NYSE: P  ) ?

Don't laugh. It's true that the music discovery pioneer is out of favor these days. The stock took a beating last week after announcing disappointing guidance. There are also incessant reports on Apple (NASDAQ: AAPL  ) negotiating with record labels for licensing rights to roll out its own streaming service.

These are problematic times for Pandora, but they may also prove to be opportunistic for Sirius XM.

Snapping up Pandora isn't as silly as it may seem. Let me count the ways.

1. Pandora would provide top-line growth.
Sirius XM has been a beast when it comes to margin-widening improvement on its bottom line, but it hasn't been much of a top-line grower in recent years.

Even with a 12% rate increase that began kicking in back in January, analysts see revenue growing by just 13% this year. They see growth decelerating to a 12% advance next year. Wall Street, on the other hand, sees Pandora growing its top line by 55% this year and 41% come 2013.

2. Sirius XM would be able to milk more premium revenue out of Pandora.
Too many people enjoy Pandora as a free ad-based service, and that's getting in the way of the streaming speedster's consistent profitability.

It isn't like Spotify, which recently announced that it now has more than 5 million paying subscribers.

Well, Sirius XM could change that. Instead of reinventing the wheel with a music discovery service that will likely be inferior to Pandora based on reasoning alone, Sirius XM could grow its streaming subscribers by making Pandora its included personalized radio platform. The end result is more revenue.

3. Sirius XM has billions in tax loss carryforwards.
One of the selling points for Sirius XM now that it's profitable is that it doesn't have to pay much in taxes. It has amassed billions in net losses in prior years that can be used to offset taxable gains now. With Sirius XM's ability to improve on the premium revenue at Pandora -- transforming it into the consistently profitable company that it should have been all along -- pre-tax earnings will be more valuable at Sirius XM.

4. It would consolidate the ad sales teams.
Pandora's grown adept at selling online ads, and Sirius XM's growing base of paying subscribers makes it an attractive draw for advertisers. The two Rolodexes combining would be a potent thing.

Advertisers would welcome Sirius XM as a one-stop shop to reach both offline and online listeners, and that can only drive rates higher.

5. Karmazin's leaving.
Karmazin may have publicly dissed any potential buyout candidates, but his replacement will take over in less than two months.

New leadership may prove to be more warm for Pandora.

Liberty Media (NASDAQ: STRZA  ) -- with majority control -- has a history of taking a liking to category killers in the media industry. Pandora has to be attractive at some level.

6. There are opportunities for cross-promotion. 
One can argue that satellite radio listeners and fans of customized streams are different critters, but it's ultimately all about the pursuit of eardrums. Pandora would be able to promote the content on Sirius XM, perhaps even offering limited branded channels from time to time.

7. When Apple comes, two heads will be better than one.
Apple's arrival is something that Pandora investors are obviously fearing, but it's not as if Sirius XM doesn't have anything to worry about.

Apple isn't the leading seller of music in the country by accident. If it sees streaming as a lucrative service -- and there are already a growing number of cars that take advantage of Apple's Bluetooth connectivity to stream through dashboards -- Sirius XM will need to respond to Apple's threat.

Having Pandora's 59.2 million active listeners on its side when the battle begins will help for when the battle intensifies.

Running of the bulls
I recently put out a premium report on Sirius XM Radio, detailing the challenges and opportunities that await investors whether they're long or short the dynamic media giant. A year of updates is also included with the report. Click here to check it out now.


Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 11, 2012, at 11:55 AM, 67vair wrote:

    Why would they buy a company that has never made a profit? Never going to happen and shouldn't even be considered.

  • Report this Comment On December 11, 2012, at 5:28 PM, southernbeachguy wrote:

    Rick, thanks for the past years of good articles about Sirus. On this one case to buy Pandora, I would only say that I don't want them. I still think that a majority of the people that use Pandora are people to cheap to pay for Good Service. Sirus would do better by enhancing it's own Internet platform and let Pandora fall off the World into Never never land.

  • Report this Comment On December 11, 2012, at 7:44 PM, gasboy48 wrote:

    I like the idea Rick. I agree that most current Pandora users are a cheap bunch, but name recognition and a good product added to sirius content will bring more value to current sirius services. I don't think that it will survive on it's own, so why not buy if it can be acquired on the cheap?

  • Report this Comment On December 12, 2012, at 12:02 PM, ctag1003 wrote:

    I own Sirius Radio, Siri Stock and P Stock.... When it comes to music - 100% of the time I listen to Pandora over sirius...when I want talk radio I listen to Sirius. The music content on Pandora is more personal to my taste and much more enjoyable....Using Pandora for music avoids having to listen to some of the horrible radio personalities on Sirius. So I disagree that Pandora listeners are too cheap...maybe they are smarter than you think...why pay for music from Sirius when you can get it for free from Pandora.....talk radio is a service that Pandora is yet to offer.

  • Report this Comment On December 12, 2012, at 4:43 PM, mjweitz wrote:

    I as well own Sirius Radio, Stock, and on the contrary also a paid Pandora One user, and never find my self listening to it. 90% of the people I know do not pay for Pandora's yearly flat fee for ad free listening. I find the content too repetitive; and when I can't skip more than 6 songs an hour for "personalized" music, I find my self shutting it off. Though, I will continue to pay to switch up the rhythm every now and then. However, with an already existing platform, world renown name and user-base, it could only bring a better value to where Sirius is today. My new navigation system in my car has Pandora built it; it's just another outlet for Sirius to tap into piggybacking off wireless data and easy synchronization.

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