Wedbush: Pandora Investor Reaction Suggests 'Sirius' Problem With M&A Deal

In a move that may be confusing to some investors, shares of Pandora Media Inc P closed Monday down by more than 1 percent at $8.98 despite a firm acquisition offer from Sirius XM Holdings Inc SIRI at an implied price of $10.14 per share.

There may be some logic behind the move, as Pandora investors are likely to reject the deal, in Wedbush's view. 

The Analyst

Wedbush's Michael Pachter maintained an Outperform rating on Pandora Media with an unchanged $10 price target.

Credit Suisse's Brian Russo downgraded Sirius XM Holdings from Outperform to Neutral with a price target lowered from $8.50 to $7.50.

Pachter: Revised Deal Needed

Sirius' $3.5-billion, all-stock offer to acquire Pandora implies a premium of nearly 14 percent to Pandora's 30-day volume-weighted average price and would give Pandora investors ownership of 8.6 percent of the combined entity, Pachter said in a research report. The acquisition offer also calls for a fixed exchange ratio of 1.44 new Sirius XM shares, and Sirius XM's 10-percent selloff now implies a deal price of just $9.01 — which represents a 0.8 percent premium to Friday's closing price.

Pandora will need to re-negotiate a deal with Sirius XM and then be approved by Pandora investors during a special meeting which has yet to be scheduled, the analyst wrote. Sirius XM will likely need to offer a fixed price for an all-stock transaction to be approved that is based on a sufficient premium to Friday's closing price, the analyst said. 

A combination of the two entities "makes a lot of sense," as it ties the leading satellite broadcast radio provider with an online streaming radio and music provider, Pachter said. The limited customer overlap benefits Sirius XM, giving it access to Pandora's user base, streaming knowledge and technical acumen, he said.

On Pandora's end, the streaming service benefits from Sirius XM's much larger footprint, subscription expertise and automaker relationships, the analyst said. 

The terms of the acquisition must be renegotiated, in Pachter's view, and failure to do so is likely to result in the rejection of the deal in its present form. 

Russo: Game-Changing Scenario For Sirius XM

Sirius XM's proposed acquisition of Pandora is consistent with its desire to push into the ad-supported radio business, Russo said in the downgrade note.

Buying Pandora gives Sirius XM immediate access to a new market and would come at a more favorable price tag than in the past, as the average Sirius XM-to-Pandora market cap ratio is 12.9 times now, versus 7.8 times in 2016, the analyst said. 

Yet the bullish case for Sirius XM can no longer be made, as the acquisition of Pandora would change the narrative, Russo said. Credit Suisse's bull case for Sirius XM was based on the company's solid fundamentals as a standalone satellite radio operator backed by a notable stock buyback, the analyst said. 

The synergy opportunities between the two companies are "unclear at this time," and so are management's capital deployment intentions, according to Credit Suisse. 

Price Action

Pandora shares were up 0.89 percent at $9.06 at the time of publication Tuesday, while Siriu shares were up 0.24 percent at $6.28. 

Related Links:

Sirius Was Likely Impressed With Pandora's Near-Term Execution, Analyst Says After Acquisition Announcement

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