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SiriusXM Gets Serious About Podcasts

By Evan Niu, CFA – Jul 14, 2020 at 10:00AM

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Can the satellite radio specialist hold its own against Apple and Spotify?

In line with rumors that surfaced earlier this month, SiriusXM (SIRI 0.95%) officially confirmed this week that it will acquire podcasting platform Stitcher from E.W. Scripps (SSP -2.55%). The satellite radio company has been aggressively expanding into streaming in recent years, including its $3.5 billion acquisition of Pandora Media that closed last year. SiriusXM is trying to better compete with Apple (AAPL 0.85%) and Spotify (SPOT 0.47%), which collectively dominate both music streaming and podcasting.

Here's what investors need to know.

Illustration of a microphone and audio waves

Image source: Getty Images.

A major gain for Scripps

SiriusXM will pay Scripps $325 million for Stitcher, which will be made up of an up-front cash payment of $265 million plus another two $30 million payouts if Stitcher can hit certain performance milestones this year and next. The deal is expected to close in the third quarter.

The sale represents a meaningful windfall for Scripps, which had $180 million in cash at the end of the first quarter. Scripps had acquired Stitcher for a mere $4.5 million in 2016 from Deezer. That acquisition came shortly after Scripps had bought Midroll in 2015 for $55 million, which included an advertising network. Scripps combined both companies into a comprehensive podcasting platform that offers production, distribution, and monetization tools for podcast creators and publishers.

In addition to those up-front price tags, Scripps has been investing in its podcast business over the past five years. The sale represents a return of over 100% after including those investments, according to Scripps. The company estimates that it will record a tax liability of roughly $70 million if it earns both performance payouts, with net operating loss carryforwards offsetting around $40 million of that liability this year. Scripps plans to use some of the cash to pay down debt.

The news comes less than a month after SiriusXM scooped up podcast management and analytics specialist Simplecast, which will be merged with the company's existing advertising technology subsidiary AdsWizz.

"The addition of Stitcher is an important next step as we continue to develop and strengthen our offering in the fast-growing podcasting market," SiriusXM CEO Jim Meyer said in a statement. "With Stitcher, we will expand our digital audio advertising presence and look to generate new ways for creators to find and connect with their audiences."

Stitching it all together

SiriusXM's task now turns to integrating all of these disparate acquired parts into a cohesive platform with a viable strategy to compete with Apple and Spotify. Spotify has spent the past year and a half scooping up podcasting start-ups while inking expensive exclusivity deals with prominent podcasters and celebrities like Joe Rogan and Kim Kardashian West.

Spotify CEO Daniel Ek has laid out a clear vision to transform Spotify into a broader platform for all audio content, and investors are optimistic due to the implications for the Swedish company's cost structure. The aggressive push has awakened Apple, which has long been the leader in podcasts but has not moved the industry forward in terms of technology or innovation for years.

The rivalry is renewing the Mac maker's interest as it now plays defense and explores original content and exclusivity deals. It's going to be quite an uphill battle for SiriusXM.

Evan Niu, CFA owns shares of Apple and Spotify Technology. The Motley Fool owns shares of and recommends Apple and Spotify Technology. The Motley Fool recommends Sirius XM Radio. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
$5.87 (0.95%) $0.06
Apple Inc. Stock Quote
Apple Inc.
$152.04 (0.85%) $1.27
The E. W. Scripps Company Stock Quote
The E. W. Scripps Company
$12.04 (-2.55%) $0.32
Spotify Stock Quote
$89.56 (0.47%) $0.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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