It's been only a month since Pandora Media Inc. (NYSE:P) signed a deal to get a cash infusion from KRR. A cancellation clause in the contract gave the struggling music streamer the right to pursue other options, establishing a $22.5 million termination fee to be paid to KKR if it decided to pull out of the deal. Sure enough, Pandora triggered the cancellation clause as it took in a $480 million investment from Sirius XM Holdings Inc. (NASDAQ:SIRI), and so begins the next chapter of its story.
In a separate deal, Pandora announced it is selling its ticketing service, Ticketfly, for $200 million to Eventbrite. The company had purchased Ticketfly for $450 million two years ago.
Why does Pandora need cash?
At the end of the first quarter, Pandora had about $203 million in cash, cash equivalents, and short-term securities. Last year its cash flow from operations was roughly negative $182 million. If the company operated as it did last year, it only had about a year's worth of money left to work with. That's just cutting it too close for comfort.
Add to the mix that Pandora just launched its new on-demand music service and that on-demand music carries a higher royalty rate than music streamed via the ad-supported model. Throw in the 60-day free trial period for listeners and you have created a cash drain.
The deal with Sirius XM
The best part about the deal with Sirius XM for Pandora shareholders is that it should improve the management of the company. Sirus XM will receive three seats on Pandora's nine-person board of directors, with one of those directors acting in the role as chairman.
The company will invest $480 million in cash and in return will receive the option to convert its preferred stock to a 16% ownership stake in Pandora. The preferred stock will have a 6% cumulative cash dividend, and the price to convert to common stock will be equal to $10.50 per share.
It is also worth noting that David Faber of CNBC reported that Sirius offered to buy the entire company for $8.00 per share and the offer was rejected by Pandora's management.
Why is Sirius investing in Pandora?
Sirius is 65% owned by The Liberty SiriusXM Group, part of John Malone's Liberty Media empire. There have been on-and-off talks for almost a year between Sirius and Pandora about a buyout that would bring the company into the Liberty Media family. The companies never could agree on price.
The current deal allows Sirus XM to own a piece of Pandora. Here is what Jim Meyer, chief executive officer of Sirus XM, said in a statement about the investment:
This strategic investment in Pandora represents a unique opportunity for Sirus XM to create value for its stockholders by investing in the leader in the ad-supported digital radio business, a space where Sirus XM does not play today.
Pandora's large user base and its ability to provide listeners with a personalized music experience are tremendous assets. With its strong technology and new product offerings, we believe there are exciting opportunities for Pandora to accelerate its growth and increase value for Pandora and SiriusXM stockholders.
How will this all play out?
There's no way to sugarcoat this: Owning Pandora stock has been a painful experience for many investors. It is not that much of a stretch to see Pandora as a company being absorbed by a bigger player. Over time, we may see Sirus XM increase its ownership stake and potentially buy the entire company.