Playing The Sirius XM-Pandora Merger

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About: Pandora Media (P), SIRI, Includes: LSXMA, LSXMK
by: Spencer Osborne

Summary

The proposed all stock buyout could allow savvy investors to garner more shares.

When complete, Pandora shareholders will receive 1.44 Sirius XM shares for each Pandora share.

Between Liberty Media, Sirius XM, and Pandora, there are several ways to play the satellite radio space.

Sometimes a few percentage points can make a difference. Sometimes, with some good estimations, a savvy investor can gain a few points on an investment they wanted to make anyway. Readers should bear in mind that these strategies are mostly attractive to those trading in retirement accounts, or those looking to build or add to a position.

Sirius XM (SIRI) is in the midst of buying out Pandora (P) in an all-stock transaction. Boiling things down to the most simple terms, the deal is pretty straightforward. Pandora shareholders will receive 1.44 shares of Sirius XM stock for each Pandora share.

As of this writing, the price for Sirius XM stock is $6.23 per share. Meanwhile, the price of a Pandora share is currently $8.85. The implied value of a Pandora share at 1.44 times a Sirius XM share is $8.97 per share. In essence, the Pandora shares are trading at a discount to what Sirius XM will be paying when the buyout gets finalized. As of this writing, that discount is $0.12 per share, or about a 1.4% discount. That is not a lot, but let's consider bigger lots.

If you were contemplating buying 1,000 shares of Sirius XM, you would plunk down $6,230.

What would happen if you instead bought Pandora? That same $6,230 would buy you 704 shares of Pandora. Now let's assume the deal goes through. You will wind up with 1,014 shares of Sirius XM.

That may not seem like a big deal, but it is money in your pocket instead of not. Over the past month, the available premium has been as high as 2.28% and has traded 66% of the time in the premium territory. If you are looking to make a play in this space, there is certainly opportunity to maximize that play.

SiriusXM and Pandora Chart Chart Source - Spencer Osborne

Again, I must stress that this strategy is one that is best deployed for new shares purchased, or in a retirement account where capital gains or losses do not come into play. Current holders of Sirius XM shares should not contemplate selling them to get a huge arbitrage in this deal. The taxes associated with such a move would make it counterproductive.

The key with this strategy is to try to be realistic. If you attempt to get the peak arbitrage, you may never see it. However, if you look to play it when it is near a couple of points, you may have a decent shot at some "free shares".

This then brings about an overall strategy in the family tree that is Liberty Media, Sirius XM, Pandora, Live Nation, etc. That couple of points in the Pandora vs. Sirius XM strategy is child's play compared to the relative discount that Liberty Sirius XM (LSXMA) (LSXMK) trades in relation to Sirius XM. In fact, there may be a better play in that arbitrage than with the Sirius XM and Pandora arbitrage on any given day. The discount of Liberty Sirius XM trades at is a huge 32% at this point in time. That being said, the arbitrage play of Liberty Media and Sirius XM is a longer term play vs. the much more immediate buyout that appears to be poised to happen in Q1 of 2019.

The bottom line is that there are moves that potential investors and existing investors can make to play the Sirius XM and Pandora transaction that can actually benefit the little guy. This type of trade is not one that you will brag about in terms of raw numbers, but it is one that has very little risk if you are already looking to play the sector. This deal is a few months away, and it will most certainly be approved and closed. Pandora has already let the "shopping for a better deal" clock expire, so the proverbial writing is on the wall.

Sometimes making a couple of percentage points for doing what you would already do anyway (or have already done) offers a level of satisfaction that has its own value.

The other possibility here is to play for existing Pandora holders is to sell stock when the arbitrage is higher than the premium offered by Sirius XM and buy back when the adverse happens. This involves more trades and commission, but timed correctly can put dollars in your pocket.

This transaction is closing in the very near term, so why not have some fun with it and be the savvy investor that squeezed a few more bucks out of the deal. Stay Tuned!

Disclosure: I am/we are long SIRI, LSXMA, P.

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.