Sirius XM to Buy Pandora

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Sirius XM Holdings Inc. SIRI -8.88% agreed to buy online-music firm Pandora Media Inc. P +0.28% for $3 billion, as the satellite-radio company looks to add streaming services in the increasingly competitive fight for listeners.

The all-stock deal would create an audio-entertainment company with a market value of around $30 billion, rivaling music-streaming market leader Spotify Technology SA.

The deal is expected to help Sirius expand its offerings beyond cars, where most satellite-radio users listen, and to provide financial resources to Pandora as it tries to compete with on-demand music-streaming rivals like Spotify and Apple Music. Both companies are seeking to gain market share as listeners migrate from broadcast radio to digital and streaming options.

“This transaction is all about creating growth opportunities together that are not available to separate companies,” Sirius XM Chief Executive Jim Meyer said on a call Monday.

Pandora says it has 70 million monthly active users. SiriusXM has 36 million paying subscribers in the U.S. and Canada, plus some 23 million more annual trial listeners who get the service for a period for free when they buy a car.

Mr. Meyer said the majority of people in trial ultimately decide not to pay for a subscription. The acquisition announced Monday, he added, gives Sirius the opportunity to refer tens of millions of users to Pandora’s free, ad-supported radio offering.

“There’s significant opportunity to cross-promote across two subscriber bases and take share—you can guess where from—from other audio platforms out there today,” Mr. Meyer said.

“We do know that our customers stream quite a bit,” Mr. Meyer said, adding that the two companies “complement each other as opposed to compete with each other.”

Music-streaming services have been growing in recent years, and U.S. consumer spending in that area is expected to jump 29% to $6.6 billion this year, said the Consumer Technology Association, an industry group. Spotify is the global leader, with 83 million paying subscribers as of June, but Apple Music has been catching up to Spotify in the U.S.

Sirius XM, which has John Malone’s Liberty Media Corp. as a controlling shareholder, already owns a part of Pandora.

Last year, Sirius paid $480 million for a roughly 19% stake in Pandora, helping the internet radio company shore up its balance sheet as consumers migrated to on-demand listening options. Soon after, Roger Lynch, formerly Sling TV’s CEO, took the helm at Pandora. Since then, the company’s stock has rebounded as the company put resources into enhancing its large ad-supported business and introduced more of its listeners to its own on-demand offering.

“We’re in a great position now to compete with other services,” Mr. Lynch said on the call. “The deal will improve our strong position as a streaming music company.”

Mr. Meyer, when asked about opportunities to better negotiate with labels and other rights holders, said the two companies have “tremendous respect” for what artists bring to their models and would together in 2019 pay royalties approaching about $2 billion to various rightsholders.

“I think this merger will be good for everyone in music,” he said. “If we are successful we will begin to shift share from channels that aren’t paying performance rights.”

Terrestrial radio broadcasters in the U.S. pay royalties to songwriters but not to performers or the record labels that control their sound recordings.

Pandora reported 74.7 million active users in 2017, nearly all of them listeners of its free service that lets users create custom radio stations based on their musical tastes, and plays ads, much like traditional commercial radio.

The number of users represented an 8.3% decline from a peak in 2014. The company added 351,000 paying subscribers for various ad-free offerings in the three months ended June 30 of this year, bringing its total to 6 million subscribers. Revenue increased 2.1% in the quarter to $384.8 million. The company, like other music-streaming peers, has never reported a profit.

Sirius said in 2017 that it had 32.7 million subscribers, a figure that has trended steadily upward for several years. The company reported $1.14 billion in subscriber revenue during the most recent quarter, up 2.5% from the comparable quarter a year ago. Total revenue rose 6.3% to $1.43 billion, and Sirius reported net income of $292.4 million, up 45%.

Under the deal—which the companies valued at $3.5 billion, including debt—Pandora shareholders would swap each share for 1.44 newly issued shares of Sirius XM.

Shares of Sirius fell 8.7% Monday to $6.37, while shares of Pandora slipped 0.2% to $9.07.

The deal has a “go-shop” provision, which allows Pandora and its board to talk with other parties about doing a different deal. Mr. Lynch said the go-shop period was an important component of the negotiation for Pandora’s board, but Raymond James analyst Justin Patterson said in a note the relatively modest premium reflects Sirius’s confidence that it is the primary bidder for Pandora.

Finding a second bidder will come down to another buyer’s interest in Pandora’s audio advertising technology.

Assuming no other bids, the companies expect the deal to close by April. Pandora shareholders would hold about 8.6% of the combined company.

Sirius XM also reiterated its financial guidance for the year, while Pandora backed its third-quarter outlook.

Corrections & Amplifications
Pandora had $250.3 million in net long-term debt and $505.7 million in redeemable convertible preferred stock as of its most recent quarterly filing. An earlier version of this article incorrectly stated it had $273 million in long-term debt and $490.8 million in redeemable convertible preferred stock.

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