Sirius XM Radio (SIRI 13.75%) and Pandora (P) aren't getting married, but they've agreed to keep spare toothbrushes in the other's place. The satellite radio giant announced on Friday morning that it's making a $480 million investment in Pandora through a subsidiary, effectively nixing the $150 million financing deal that the online streaming pioneer had struck with private equity firm KKR just last month. Pandora also agreed to unload its Ticketfly subsidiary in a separate $200 million transaction.
Sirius XM will be receiving convertible preferred stock in the deal, a 19% chunk of Pandora's current outstanding shares or a 16% position on an as-converted basis. The referred shares will bear a 6% cumulative dividend, something that Sirius XM can choose to shell out in more convertible preferred stock than cash if it feels liquidity is an issue. Sirius XM won't mind if it gets paid in stock, helping it nibble its way into a larger position.
Let's make a deal
Sirius XM's $480 million investment should benefit all three parties involved in the transaction. KKR will walk away with $22.5 million that Pandora has to pay for terminating last month's transaction, a decent return for KKR for money that it never actually had to shell out. However, it will be Pandora and Sirius XM that truly come out ahead in this exchange.
Pandora was hungry for cash as it struggles with escalating music royalties that it has to shell out and its inability to get more its active users to pay for premium subscriptions. Sirius XM is more than just a sugar daddy here. It knows a thing or two about selling an audio product that users don't mind paying to receive. Sirius XM also has a deep bench of advertisers, something that Pandora is obviously going to need since the vast majority of its 76.7 million active listeners are freeloaders.
Sirius XM also stands to gain a lot out of its investment. Right off the bat, this was the same company that was reportedly shot down when it offered to buy all of Pandora last summer for $15 a share. It now has access to a nearly a fifth of the company at a per-share conversion price that is substantially lower than the price that wasn't good enough a year ago. Sirius XM also gains ground in streaming here.
Sirius XM knows that connected cars and streaming music apps can be disruptive to its business. If it can't afford Spotify -- and it can't -- it may as well saddle up to a disruptor available at an opportunistic price. Sirius XM's own streaming platform has failed to gain traction as a stand-alone offering. It's a win-win -- technically a win-win-win -- deal.