Could SiriusXM Still Buy Pandora?

Merger chatter around Sirius XM Holdings Inc. SIRI and Pandora Media Inc P largely fizzled with the latter’s strategic investment.

But some on the Street still see the potential for a buyout.

The Rating

BMO Capital analyst Daniel Salmon upgraded Pandora to Outperform and lowered his price target from $11 to $7.

The Thesis

SiriusXM’s $480 million investment deal precludes incremental purchases of Pandora shares for a little over a year. But the terms leave room for an outright buyout, Salmon said in  a Thursday note. (See Salmon's track record here.)

SiriusXM could be incentivized by the opportunity in Pandora to transition from satellite to internet protocol content delivery, integration of a strong advertising business and access to a wider audience to leverage in label and automaker negotiations, the analyst said. 

The takeover possibility — just 16 percent, by Salmon’s estimates — drives BMO’s strongest bull case for a $12 Pandora value.

But Salmon sees greater likelihood in alternatives. Considering potential trend permutations in active-user growth, subscription sales and ad spending, BMO sees:

• a 19-percent probability of $10 valuation;
• a 22-percent probability of $7 valuation;
• a 23-percent probability of $4.50 valuation;
• and a 20-percent probability of $3 valuation.

Success in Pandora’s subscription services, expected boosts in audio ads and expansion of non-music content offerings justify BMO’s new Buy rating, Salmon said. 

“We generally agree with consensus that P may lack near-term catalysts, but believe some underlying secular trends and changes to the business model are being underappreciated."

Price Change

The ratings change prompted a 4-percent spike in Pandora’s stock. At the time of publication, shares were trading up 3.2 percent at a rate of $5.09, while Sirius traded marginally higher at $5.41.

Related Links:
JPMorgan Downgrades Pandora, Says Turnaround Will Take Patience
Pandora's Turnaround Could Take Some Time; Stifel Downgrades