Please ensure Javascript is enabled for purposes of website accessibility

So Much for Sirius XM Buying Pandora

By Rick Munarriz - Apr 14, 2017 at 12:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The music-streaming pioneer is reportedly looking to raise funds through private equity firms, seemingly nixing its chances at a buyout.

Pandora (P) seems to be ready to live out the rest of its life -- or at least the next few months -- as a swinging single. The New York Post is reporting that Pandora has been in talks with several leading private equity firms to raise money.

Pandora is reportedly hoping that the deep pockets of Silver Lake, KKR, Providence Equity Partners, or other firms can help it get through its current rough patch. It's grappling with a lack of profitability at a time when it's facing rising royalty payments and costs to market its new Pandora Premium platform. 

A company hitting up private equity for greenbacks wouldn't be a big deal, but this is also the same Pandora that reportedly spurned a buyout offer from Sirius XM Radio (SIRI 0.45%) last year. There's never been any official confirmation that Sirius XM offered $15 a share for Pandora, or that Pandora's board was holding out for at least $18 a share, but if Pandora does goes through with this round of fundraising, it would pretty much end any chance of the satellite radio monopoly gobbling up the pioneer of digital music discovery.

The Post's sources say that these talks are happening in talks for strategic investments, which may very well include a potential buyout -- but it's important to be realistic. If Pandora's working Plan B, it's because Plan A is falling apart.

A Pandora-sponsored music concert.

Image source: Pandora.

Turning music into money 

Private equity funds aren't dumb. They know that Pandora is desperate, just as Sirius XM was when it needed a financial lifeline in 2009 and was willing to hand over a 40% preferred-share stake just for the right to pay 15% interest on liquidity-preserving debt. Pandora is a credit risk given its stagnant usage growth and lack of consistent profitability, and the riverboat gambler among private equity firms that does step up will demand a highly dilutive stake at a discount.

If Sirius XM thinks that Pandora is too expensive now, just imagine how much lower its acceptable buyout price will be once Pandora's effective share count bloats.

It's not just private equity that Pandora has been panhandling to lately. Bloomberg reported last week that Pandora was in talks with the major record labels to see if it can score lower royalty rates that it has to pay them. Renegotiating licensing agreements isn't unusual, but the report also mentions that Pandora is requesting direct investments from the labels.  

It's not too late

The lack of a feasible buyout partner may eat into Pandora's stock, but let's not dismiss its chances as a stand-alone company. Sirius XM made a bad deal in 2009 and has still gone on to be one of the market's biggest winners over the past eight years.  

Many critics have been pointing out that the recently unveiled Pandora Premium platform is coming out too late, and that's fair. The top two players in this niche already have more than 70 million paying subscribers between them, and just 5.4% of Pandora's 81 million active listeners are currently paying for ad-free streams. However, Pandora's product is differentiated by the long usage histories and customized playlist algorithms that even its freeloaders have helped fortify over the years. Pandora is late, but perhaps not as late as its languishing stock price would seem to suggest. 

Pandora raising money may dilute shareholders, but if it gives the dot-com laggard a better fighting chance to see Pandora Premium through, it's a risk worth staying single for in the short run. It's not about dying alone. It's about living alone. And right now, Pandora just wants to live.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Pandora Media. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Pandora Media, Inc. Stock Quote
Pandora Media, Inc.
Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
$6.74 (0.45%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.