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Sirius Finally Pops the Question to Pandora

By Mac Greer – Sep 25, 2018 at 6:00PM

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Love is in the air -- Sirius got out of minority-stake territory with Pandora and is moving into the long haul.

In today's episode of Market Foolery, host Mac Greer and Motley Fool contributor Matt Argersinger hit on a few of the market's biggest stories. Sirius XM (SIRI 1.54%) announced plans to acquire Pandora (P), finally putting an end to a real bummer of an era for Pandora shareholders. Comcast (CMCSA 0.54%) offered a massive bid for Sky, while Disney (DIS 1.27%) positioned itself exactly where it wants to be with regard to that.

Also, some new FAA regulations will change the game for airlines in some major ways. However, the laws no longer touch on baggage charges, leaving airlines to charge at will. What will this mean for the companies? Tune in to find out more.

A full transcript follows the video.

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This video was recorded on Sept. 24, 2018.

Mac Greer: It's Monday, September 24th. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analyst Matt Argersinger. Matt, how are you doing? 

Matt Argersinger: I'm doing pretty good, Mac! For a Monday, I'm doing pretty good!

Greer: After the Pats lost, the New England Patriots?

Argersinger: That was disappointing. They looked really bad. Like I've said in the past, it's been an embarrassment of riches as a Patriots fan. 

Greer: You've had a good run. 

Argersinger: I can't really expect more, can I?

Greer: No. You've had a good run.

Argersinger: I'm fine.

Greer: And Tom Brady's like, what, 73 years old now?

Argersinger: Yeah. He's going to play to 75, 76, there are a few more years. 

Greer: He's made a deal with the devil. I don't know what's going on with him. Man! Clean living, I guess.

Argersinger: It's extraordinary. 

Greer: On today's show, we're going to talk legroom and baggage fees, and we're going to talk some Comcast and some Disney. But, Matt let's begin with the big deal of the day: Sirius XM is buying Pandora in a $3.5 billion all stock deal. Sirius XM already owned 15% of Pandora. They're just buying up the rest. Shareholders, not too fired up. Sirius XM shares down around 8% at the time of our taping. Now, you're a Pandora shareholder. How are you feeling? 

Argersinger: I don't know how I'm supposed to feel, Mac. [laughs] It's been a long, tough several years for Pandora. I've been a shareholder for several years now. You kind of knew the potential for this was real just because Sirius XM had the minority stake. There was always talk about them buying up the rest and merging the companies. As a Pandora shareholder, I feel like this is just the end of a sad story. At least I have an end to it now. 

Greer: It's a sad song, if it were a song.

Argersinger: Right. And the question is, since it's an all stock deal, how excited am I about owning Sirius XM shares? I guess I'm somewhat more excited, if I'm a Pandora shareholder going into Sirius XM. Sirius XM has 36 million paid subscribers. It's a pretty successful business. We talked about before the show, a business that was really close to death. What did it trade for?

Greer: It got down to around $0.11 in 2009. It was a penny stock, right?

Argersinger: It was the very definition of a penny stock. And it was loaded down with debt. But it's come back and it's very successful. One of the reasons is because it has those long-standing relationships with the car manufacturers. Generally, if you buy or rent a car, these days, you have the option of getting Sirius XM. And it's proving to be a very popular option. You get it for free for the first trial period, and then a lot of users are converting to it. They like it. I like it. I actually have Sirius XM on one of my cars. 

You have the 36 million paid subscribers for Sirius. Then, you have 70 million monthly active users for Pandora. I think the idea is, for Sirius, if we can get a good portion of those 70 million active users -- now, I know Pandora already has six million paying subscribers. But I think what they're really going after is how many of those active users that are just listening to Pandora for free with ads, how many can we convert to a paid subscription in a combined Sirius XM-Pandora app? 

I think they think, given the amount of library that we have in Pandora, but then combining it with Sirius, which has, of course, sports and comedy and live events and music, it could be a pretty compelling product. It might compete with the likes of Spotify, Apple, Amazon, some of those massive platforms. They're obviously big competitive threats.

Greer: Let's talk about that a bit more. You mentioned the stock, let's round that out. Sirius XM shares trade for north of $6 now. So, $0.11 in 2009, to north of $6. I remember talking to our very own Steve Broido, who bought the shares of Sirius XM when they were a penny stock. I remember thinking, "That's crazy!" And typically, normally, it is. Right? Most penny stocks go to zero.

Argersinger: 99 out of 100.

Greer: So this is the exception to the rule. 

Argersinger: Very big exception. 

Greer: But I think when you look back at Sirius XM, one clear differentiator in terms of their programming, Howard Stern. I think you could very much make the argument that Howard Stern single-handedly saved this company.

Argersinger: Yes. And they paid him hundreds of million dollars to do it.

Greer: And it was a great investment, right?

Argersinger: Oh, yeah, it was.

Greer: But Howard is going to retire at some point. Obviously, they'll have that content for a certain number of years, and they can replay that content just like the replay Casey Kasem. I listen to the top 40 from the '70s, that's my guilty pleasure on weekends. But going forward, if Howard's not in the picture, what is Sirius XM's special sauce when they're competing with the likes of an Apple or a Spotify?

Argersinger: Well, it's going to be tough. I think the deal here is, Sirius and Pandora face tremendous royalty costs for artists, for labels, to comedians, and things like that. If you scale that out -- in other words, you combine these two fairly rich libraries of content -- and you really streamline your costs, because now you're spreading your costs over a much larger subscriber base, I think they can have a pretty compelling offer. Especially when you link it to the cars or people who are on the go where radio is just not a great option. It can be really compelling option. So now, if I combine that with my Pandora music, it's something I think a lot of users are willing to pay for. Really, to make this deal work, you don't need a huge percentage of that 70 million active user base of Pandora to convert over before it starts looking like a good deal.

Greer: Matt, let's talk about another big deal. On Saturday, Comcast offering $39 billion for Sky, topping the bid from rival 21st Century Fox. This isn't a done deal yet. It's going to get a little messy. You consider that Disney owns 39% of Sky.

Argersinger: Through Fox.

Greer: Through Fox. So now, Comcast has to deal with Disney. When you look at what it might mean for investors, shares of Comcast down today around 7%. Shares of Disney up 2%.

Argersinger: I think that tells the whole story. [laughs] You have to go back to December 2016 when Fox originally bid to acquire the 61% of Sky it didn't already own. This was before Disney and Comcast got into a war over Fox. This was before Comcast even jumped into the bid for Sky. Here we are today. Comcast has outbid Fox, which is soon to be owned by Disney, and they're paying a huge premium. If you look back to the original deal with Fox, it was somewhere around 11 pounds that Fox was originally going to pay for Sky back in December 2016, I think Comcast is paying around 17 pounds, a 61% premium for Sky shareholders. So, it's been a good run for them. 

What that does, and the reason I think Comcast is down and Disney is up, is because, one, Comcast is paying a huge premium. But, from Disney's perspective, you own this 39% of sky through Fox that now is valued at around $15 billion. I believe that Disney is going to look to offload that to Comcast probably around that level. Now, Disney gets $15 billion through this Sky deal. That's helpful, pays down a lot of debt. But now, I think Comcast is in a position -- we talked about this for the show, which I think is key -- the 30% of Hulu that they own, Disney and Fox own 60%, Comcast owns 30%, AT&T has 10%. But now, maybe, as part of giving up that 39% of Sky that Disney owns, in addition to cash, they're probably going to want that 30% Hulu stake. Then they have 90% of Hulu. I don't think Comcast is going to hold on a 30% of Hulu if they know that Disney and Fox own a 60% majority stake. They're running the bus. Why would they hold on? 

In a way, at the end the day, Disney is getting a lot more cash than they thought, potentially, for Sky. They're getting probably a 90% stake in Hulu. Disney is looking pretty good. Comcast, on the other hand, has now paid a huge premium for what is effectively another cable company. I know it's a satellite business, top box operator. But they're essentially paying for the same business, just in an international setting. It's got some great assets, got some good content. But Comcast just paid a lot for acquiring essentially an international asset that looks very much like what they have in the United States. Disney now has more cash, is focused on its core content, focused on its own distribution. It doesn't really ultimately need Sky. It doesn't need more international distribution. It's going to have its distribution through its apps, through the ESPN+ app, through the Disney app, and now through Hulu, where they have a vast majority stake.

Greer: I'm a Disney shareholder, so I should be pretty excited. It sounds like Comcast may have overpaid here, and, and, and, if Disney plays this right, they still may keep Hulu.

Argersinger: Yes. I think Disney comes out of this feeling pretty good. They're not paying a huge premium for Sky. They just finished paying a huge premium for Fox. The deal hasn't even gone through yet. They've let Comcast have those assets. Disney gets what they ultimately want, which is a lot of cash to pay down some debt, Hulu, and they're off to the races. And Comcast can deal with integrating Sky for the next several years.

Greer: Matt, let's close with the sexy world of FAA reauthorization legislation. I want to talk airlines because we had a bill this Saturday to reauthorize the FAA. A few interesting things here. Now, the bill is going to require the FAA to set minimum dimensions for seats. For me, most interestingly, leg room. The leg room is just getting ridiculous on airlines.

Argersinger: It is. It'll be interesting to see what they determine a standard human is. What are the dimensions? I haven't read the report. Hopefully it's relatively comfortable for someone as big as ... what are you? 

Greer: 6'1-ish. Shrinking. [laughs] 

Argersinger: [laughs] I feel like it's just gotten really tight.

Greer: So that's good. They're going to have minimum width and leg room. All that good stuff.

Argersinger: That's a win.

Greer: There are going to be other passenger protections, which is a win. But one thing that's really making news is that there was language in the legislation to mandate "reasonable and proportional baggage and change fees." That language has now been removed. You're a guy who follows the airlines. You follow airline stocks. There's going to be nothing in this bill holding the airlines back from just charging fees on baggage and charging all these additional fees. Is that a good thing? A bad thing? What is that?

Argersinger: Obviously, if you're an airline executive, this is great news. Certainly, over the last decade, you and I have seen it, we travel, the proliferation of fees for all kinds of things, but certainly for baggage fees. Baggage fees have become a staple, table stakes for traveling. You know they're coming. The fact that airlines have been free to set their own rates, and I know a bunch of them just recently raised their baggage fees, the idea that Congress was going to try to control that, and hurt airlines' pricing power, it was troubling. As a free market guy, I don't want that. Now, as a passenger, I'm saying, "Well, I don't want to pay more fees." But I certainly understand, an airline's ability to charge what they want to charge for what they think the service is worth, and it's my choice as a consumer to pay it or not. I'm glad the government's not messing with that. As a shareholder of Delta (DAL 2.37%), for example, I'm glad that they can set their own rates and compete with other airlines on those fees. 

Now, I will point out that revenue from baggage and reservation fees for the airline industry as a whole was $7.5 billion dollars in 2017. That's a big number. The idea that growth of that number or the amount of that number could be regulated was troubling. It's a big piece of airline revenue now. So, I'm glad that's out of the hands of the government. As a shareholder, if you're interested in airlines, that's certainly good news. 

Greer: And in terms of airlines, I know in the past, Delta has been one of your favorites. Do you have a favorite airline stock right now?

Argersinger: It's still Delta for a lot of reasons. Competitively, from a margin standpoint, they seem like a great operator. They have the best investment-grade balance sheet of all the airlines. But it's just as cheap as all the other airline stocks. I feel it's a jewel, even compared to Southwest, which I know a lot of investors tend to favor. Delta seems like the better operator and it's a much cheaper stock. 

Greer: OK, well, speaking of stocks, let me hit you with my totally unfair, you should not invest this way, arbitrary desert island poll. Let's put a few of the names in play that we've talked about. If you're on a desert island, Matt, for the next five years, you can only own one of these stocks: Sirius XM, Comcast, Disney or Delta?

Argersinger: Ah, for five years. That's tricky!

Greer: And we should say that you own Pandora. 

Argersinger: Potentially, I'm going to end up owning Sirius XM. If you said I was stuck on this desert island for forever, I might say Disney. But since you said five years, and just because I think the valuation is so compelling right now, I'm going to go with Delta. 

Greer: Wow! Bullish on an airline stock.

Argersinger: Bullish on an airline.

Greer: You heard it here first. OK, Matt, thanks for joining me!

Argersinger: Thanks, Mac!

Greer: If you have questions or comments about the show, or if you just want to weigh in on our desert island poll market, [email protected] is our email. [email protected]. Thanks for joining us! As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery. This show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening and we will see you tomorrow!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Mac Greer owns shares of Amazon, Apple, and Walt Disney. Matthew Argersinger owns shares of Amazon, Delta Air Lines, Pandora Media, and Walt Disney and has the following options: short October 2018 $55 puts on Delta Air Lines. The Motley Fool owns shares of and recommends Amazon, Apple, Pandora Media, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Comcast and Southwest Airlines. The Motley Fool has a disclosure policy.

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