If you were pitting Sirius XM Holdings (SIRI 0.16%) against Pandora Media (P) several months ago, it would've been a pretty good fight. Sirius XM is the slow-yet-steady producer with consistent profitability and expanding free cash flow. Pandora has had its challenges when it comes to growing its streaming audience and its sharply decelerating revenue growth, but it was coming into its own as a market darling in 2018. Pandora stock rose 68% in 2018, more than doubling at one point before the general market swoon.
The battle of the bands changed in late September when Sirius XM agreed to acquire Pandora in an all-stock deal that was originally valued at $3.5 billion. The dueling musicians are now about to become bandmates, but this doesn't mean that this isn't an argument worth entertaining. Pandora is actually trading at a slight discount to the buyout value with its shareholder vote pending later this month. Things will get even more interesting if the pairing comes undone.
Facing the music
Sirius XM has been a surprisingly reliable investment since bottoming out in early 2009. The stock has delivered positive returns for 10 years in a row. Growth may be slowing -- revenue rose a mere 6% in its latest quarter -- but the popularity of satellite radio continues to expand. Sirius XM is up to 33.7 million total subscribers.
Pandora's popularity is going the other way. There are 68.8 million active users on the platform, down from 73.3 million a year earlier. It will still look good on Sirius XM's arm after shareholders approve the combination on Jan. 29.
Sirius XM has struggled to become a force in premium streaming, and Pandora's actually growing the number of members who are now paying for the service. Pandora's average revenue per subscriber, as well as its average advertising revenue per user, is moving higher. Sirius XM will be able to enhance its online presence through Pandora, and the pairing makes sense since it already owns nearly a fifth of the company.
Betting on Sirius XM makes sense, and its chance of moving higher for the 11th consecutive year is strong. Buying Pandora can get you in slightly cheaper. Every share of Pandora is set to be exchanged for 1.44 shares of Sirius XM. Sirius XM's close of $6.22 on Monday would value Pandora shares at $8.96. The stock is at $8.83, a 1.5% discount to its takeout value. The rub here is that Pandora stock would take a big hit if the deal should fall apart later this month. The gamble may not be worth the 1.5% discount, especially when there's already a way to buy into Sirius XM at an even bigger markdown. Sirius XM gets the nod here for most investors, though riverboat gamblers with a fair amount of risk tolerance can't be blamed for rolling with Pandora and its 1.5% discount.
Check out the latest Sirius XM earnings call transcript.