In this clip from Industry Focus: Tech, Dylan Lewis and David Kretzmann go over what that deal might look like for Sirius (NASDAQ:SIRI)in terms of its market cap, how well the company is doing financially and how likely that success is to continue, what Sirius might want out of a partnership with Pandora in particular, what Sirius shareholders are going to want to know before the deal goes through, and more.
A full transcript follows the video.
This podcast was recorded on Dec. 9, 2016.
Dylan Lewis: So, what would a deal look like for these two companies? Sirius is a $22 billion market cap company. Based on the deal estimates I talked about, Pandora would probably be about a $4 billion buy roughly, we'll say. Sirius has about $550 million in cash right now, and about $5.7 billion in long-term debt. It's not going to be a cash acquisition, in terms of funded by cash. This looks like it would be debt or a share-based deal. You think about the size of the market caps, and it's not a huge acquisition, it's not a huge bite. But you look at what it would be doing for them on their financials, this would be a pretty big bet for Sirius.
David Kretzmann: Yeah, it definitely would. And Sirius is in a decent financial position. They are generating about $1.4 billion in free cash flow annually. It's a very attractive business model that they have. They dominate satellite radio. They have no competition there. And they're installed in about 75% of new cars that come off the lot. So, they have long-term contracts with Ford, Toyota, and stuff to have that satellite radio technology pre-installed in the cars. And then, they just try to convert new car buyers to become subscribers. It's a very lucrative model, if you can continue to attract and retain subscribers. So, they are generating a lot of cash, and over the past few years, they have bought back a lot of stock. I think the share count is down about 25% over the past few years. So, they're not necessarily a fast grower, but right now Sirius has about 31 million subscribers, that's up from around 20 million in 2011. So, it has been a surprising growing business. You wouldn't necessarily think satellite radio would be a hit. But when you have, essentially, no competition, you have long-term contracts with all the major auto manufacturers, they've done pretty well.
But it would be interesting to see where Pandora would fit into Sirius. Right now, Sirius does have a mobile app, so you can stream and listen to some of their content, including some of their music, on the app. It's not a very robust offering, so perhaps Pandora is a way for them to boost their mobile and digital content. I don't know if Sirius would ever offer a stand-alone streaming service, or something, where you can subscribe and listen to the Howard Stern Show or The Ellen Show or whatever it might be, in addition to all the music options that Pandora brings. That could be one option. Or maybe it's just something to complement their existing service. But, looking at the financial situation of Pandora now, I would want Sirius management to outline a compelling case for how they could turn Pandora around when Pandora, after 10 years of being the first mover and the top dog in the industry for a long time -- how is Pandora going to turn that around and become a profitable addition to Sirius? That question needs to be answered for shareholders to be happy with any sort of deal.
Lewis: Yeah, and you look at what Pandora has been going through, and Sirius buying them would not be them acquiring customers and the potential for dramatically more customers. Their user growth has been pretty stagnant lately. So, the people who use the service really like it. Listener hours are actually trending nicely, but they have had trouble acquiring new users. And for them to drop a lot of money, and to make a more digital streaming type play, I think you want something that is clearly resonating with that audience, and isn't just flat-lining.
Kretzmann: Yeah, and you think about it, and that could be one way that Pandora and Sirius differentiate themselves in the streaming space. If you have additional radio content, like, Sirius has long-term contracts with Howard Stern and a lot of other entertainers, performers and radio personalities, if you complement that with the music streaming, that's something that Amazon and Apple and Spotify don't really have. That could be one way that Sirius makes a bigger entrance into the space with more of a competitive advantage. So, I could see that working out. But again, it would just have to be spelled out very clearly, I think, for shareholders of Sirius to be happy with the deal.
David Kretzmann owns shares of AMZN and Sirius XM Radio. Dylan Lewis owns shares of AAPL and Pandora Media. The Motley Fool owns shares of and recommends AMZN, AAPL, Ford, and Pandora Media. The Motley Fool has the following options: long January 2018 $90 calls on AAPL and short January 2018 $95 calls on AAPL. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.