It didn't take long for Sirius XM Holdings (NASDAQ:SIRI) to realize that taking a stake in Pandora (NYSE: P) wouldn't be an entirely passive experience. Sirius XM posted its fourth-quarter results on Wednesday, and Pandora left a mark.
Sirius XM took a $72 million -- or $0.02 a share -- hit to adjust for the fair value of the $480 million it invested for a piece of Pandora last year. The hit reverses the prior quarter's unrealized gains, and given Pandora's volatility it's fair to say that we'll be adjusting Sirius XM's results every quarter at this point. It's not the end of the world, but wouldn't life be easier if Sirius XM either acquired all of Pandora or cut it loose? Pandora is an intriguing property, but a mere 19% stake may not be enough to make a strategic difference for Sirius XM or move the needle outside of quarterly fair value revisions.
Panning for Pandora
Pandora's in a tough spot these days. Revenue growth is stalling. Its audience is gradually declining. The ultimate goal of transforming from being a free ad-supported streaming service to a premium platform has proven challenging, and that's a pretty big deal as the music royalty rates that it pays out continue to move higher.
Pandora announced after Wednesday's close that it's going through another restructuring. It will shave roughly 5% of its workforce, move some of its Oakland jobs to Atlanta where the costs of doing business are cheaper, and generally slash more of its expenses. The news was enough to send Pandora stock back above $5 for the first time in four weeks, but a restructuring is rarely good news.
This isn't a surrender. Pandora's aim is to reinvest the savings it will realize on growth initiatives. However, if it's struggling to establish itself as a service worth paying for by a growing number of users, it can't do much better than warming up to Sirius XM. The satellite radio monopoly is growing, closing out 2017 with 32.7 million subscribers. It's a good match on Sirius XM's side, as it has fared well with its satellite-fueled broadcasts but languished when it comes to its streaming offering as a stand-alone pay platform.
Sirius XM and Pandora plug each other's voids, and it's why Sirius XM reportedly tried to acquire it two years ago before settling for a convertible preferred stake last June. The minority position could open up the opportunities for each company to help one another out, but with Pandora's stock continuing to languish since the deal was announced, it doesn't seem as a lot of headway has been achieved on that front under the current arrangement.
Sirius XM doesn't need Pandora, and it can cut it loose. However, with the stock trading for so much less than it was when it initially bought in seven months ago, Sirius can swallow the streaming pioneer whole for a lot less than it was willing to pay in the past. We wouldn't have to worry about these quarterly fair value adjustments, and more importantly it would just be good business. How many of Sirius XM's 27.5 million self-pay subscribers can it nudge into Pandora's premium offerings?
There's another side of the argument, of course. Pandora as a fully owned subsidiary could rock the steady growth that Sirius XM has achieved if the synergies don't pan out. Actively promoting Pandora may also wean some Sirius XM subscribers off of satellite radio. It's a delicate balance, but with so many moving parts, something has to give in 2018.