Sirus XM And Pandora Rumors Swirl

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About: Pandora Media (P), SIRI, Includes: FWONA
by: Spencer Osborne
Summary

Interesting dynamics could come to play.

Could the idea of a lower corporate tax make a merger more likely?

Could other players be involved?

Pandora (NYSE:P) is up sharply today and Sirius XM (NASDAQ:SIRI) is selling off a bit on speculation that Sirius XM could buy out the Internet streaming service, or at least the fact that Pandora would be open to discussions.

According to CNBC, there have been very preliminary discussions between the two, either directly or indirectly. The concept of the two partnering up has been speculated at various levels throughout 2016.

Pandora has struggled to get to profitability, and while the service itself is widely popular, the expenses related to royalties have made monetizing the product difficult. Pandora does pay royalties in the same manner as Sirius XM.

In concept, one might wonder why Sirius XM would even bother with an acquisition of Pandora rather than simply bolstering its already existing online service. The answer is rather simple. Pandora has figured out quite a bit in the streaming realm, holds some important patents, and is a business that is already up and running. Combining the two companies could instantly increase Sirius XM's streaming business, while at the same time bringing many Pandora consumers to the Sirius XM fold for possible upselling. In addition, the advertising synergies could be very substantial.

What makes this speculation even more compelling is the results of the recent election. President-elect Donald Trump is a strong proponent of lowering the corporate tax rate from 35% to 15%. This 20-point saving could mean that companies have the ability to invest in a way that simply was less cost effective previously.

From a Sirius XM perspective, if there is seriousness behind the speculation, acting sooner rather than later may be prudent. Another nugget that President-elect Trump is trying to accomplish is the repatriation of between $2 trillion and $3 trillion that is tied up outside the United States because of the tax structure. If the tax rules get modified and these dollars can come back into the states more efficiently, we could see some big players step into the realm of considering the purchase of a company like Pandora.

Pandora investors seem to be in a good spot at the moment. On one hand, Sirius XM may want to act quickly. On the other, there is very real potential that offshore monies could come into play.

If Sirius XM is involved in this transaction, it is likely at the desire of Liberty Media (LMCA) which owns over 65% of the stock in the satellite radio provider and sees its stake grow with each passing quarter. Look for any deal to maximize the tax benefits of being an all-stock deal.

For the moment, this speculation could have some investors wondering what such a deal would mean to the recently announced $2 billion in Sirius XM's stock buyback program, or even the $0.01 per share dividend that the company intends to pay quarterly. My advice would be to watch these stocks very carefully over the next six weeks. Sirius XM has had big January moves in the past.

The last bit of cleanup here is that any such deal would have to pass muster with regulators. That may be viewed as easier under a Trump administration, but would not be a slam dunk.

I look for these stocks to have a couple of sessions of volatility and then return to normal trading patterns absent any more news on this speculation. Is the move good? Likely, it is quite good, but the devil is in the details. Pandora is currently a $3 billion company. There is a sweet spot in there somewhere, but if you are looking for a $1 billion premium, you may want to temper those thoughts a bit. Liberty Media's John Malone is a pretty shrewd businessman. Stay tuned!

Disclosure: I am/we are long SIRI, LMCA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in Pandora