The situation at Pandora (NYSE: P) is getting weirder, the money-losing music streaming service might be for sale - or not.
Reuters reported that John Malone's Liberty Media Group (NASDAQ: LMCA) has made yet another offer for Pandora. If true this is the second time that Liberty has tried to buy Pandora this year. Liberty made a $15 a share offer for Pandora in July, which would be a good deal for Pandora stockholders, the company was trading at $13.59 a share on December 5, 2016.
The offer has not been confirmed but this might be the only to keep Pandora out of the death spiral. Liberty apparently wants to fold Pandora into its satellite and digital radio service Sirius XM (NASDAQ: SIRI). Sirius unlike Pandora is making a lot of money.
There are also unconfirmed rumors that Wall Street is pressuring Amazon (NASDAQ: AMZN) to acquire Pandora. The Everything Store introduced its Pandora clone, Music Unlimited in October.
Why Pandora is Doomed
The financial numbers indicate that Pandora is in very sorry shape. It reported a negative net income of -$272.38 million and a negative free cash flow of -$140.36 million on September 30, 2016. That made for a quarter profit margin of -17.49% and an earnings per share number of -1.19 (no I'm not making this up, it's what ycharts really says).
Not surprisingly, Pandora is very close to the death spiral right now; it reported losing $250.09 million in cash from operations but had $257.75 million in cash and short-term investments at the end of third quarter. That means Pandora might run out of money at any time and shut down without a deep pocketed savior like Liberty Media or Amazon.
The business model of paying for a product; music, and giving it away for free is not working out. As I've pointed out a number of times, Pandora is a great deal for big time musicians like Taylor Swift and Beyonce. It promotes their songs and pays them for the privilege.
It's a terrible deal for Pandora stockholders who received a return on equity of -42.94% on September 30, 2016. That's right folks, Pandora investors lost almost 43¢ of every dollar they invested.
This is why activist investor Keith Meister; of the Covrvex Management hedge fund, is pushing for a sale, CBNC reported. It is the only way that investors would be able to get their money back.
Why Does Liberty want Pandora?
Naturally investors will want to know why Liberty is so interested in Pandora if the company is such a mess. The answer is an obvious one, Pandora's vast audience; the service had 81.1 million users in the United States as of December 31, 2015, Statista reported.
Pandora's user has been falling it had 81.5 million users on December 31, 2014. Despite that Pandora's revenues are growing. Pandora reported revenues of $1.096 billion in September 2015 and $1.328 billion a year later.
Liberty Chairman Greg Maffei probably thinks that he can use Pandora as a marketing channel for Sirius's subscription programming. Sirius generates quite a bit of float by selling subscription audio programming mostly to car owners. It reported revenues of $4.91 billion on September 30, 2016, up from $4.465 billion a year earlier.
Maffei might also be hoping to increase Sirius's stock value; it was trading at just $4.33 a share on December 5, 2016. Despite that Sirius is making some money; it reported a net income of $672.89 million, and a free cash flow of $356.74 million on September 30, 2016. That created a profit margin of 15.18% for the third quarter.
Sirius's operations generated $1.559 billion in cash during the third quarter of 2016. It also had $572.38 million in cash and short-term investments and assets of $8.423 billion.
Sirius is making money, but its' investors are not, ycharts reported that they received a return on equity of -172.4% on September 30, 2016. Since there's no dividend, there's also no reason for investors to buy SIRI.
Investors should stay Away from Digital Audio
One thing is certain here, investors should stay far away from digital audio. It's a great proposition for performers like Howard Stern; who's taking home an annual salary of $90 million from Sirius XM, but a lousy investment for stockholders.
That deal will get worse as big companies like Apple (NASDAQ: AAPL) and Amazon increasingly use music as a loss leader. That is they give songs away for free to entice customers to buy other products like Prime subscriptions.
Given these realities it is hard to see how digital audio providers can survive as independent companies. Sooner or later Pandora will have to be acquired by somebody just to stay in business.