7 Reasons Sirius XM Should Buy Pandora


Sirius XM Radio didn't leave a lot of doubt about its reason for initiating a $1.25 billion revolving credit facility last week. An ambitious share buyback and a small year-end distribution will more than eat up the new money being raised.

That's fair. The satellite radio provider had mentioned repurchases and payouts as two of three possible uses. It also mentioned acquisitions, but CEO Mel Karmazin has often lamented that there isn't anything out there worth buying.

Well, how about Pandora ?

Don't laugh. It's true that the music discovery pioneer is out of favor these days. The stock took a beating last week after announcing disappointing guidance. There are also incessant reports on Apple negotiating with record labels for licensing rights to roll out its own streaming service.

These are problematic times for Pandora, but they may also prove to be opportunistic for Sirius XM.

Snapping up Pandora isn't as silly as it may seem. Let me count the ways.

1. Pandora would provide top-line growth.
Sirius XM has been a beast when it comes to margin-widening improvement on its bottom line, but it hasn't been much of a top-line grower in recent years.

Even with a 12% rate increase that began kicking in back in January, analysts see revenue growing by just 13% this year. They see growth decelerating to a 12% advance next year. Wall Street, on the other hand, sees Pandora growing its top line by 55% this year and 41% come 2013.

2. Sirius XM would be able to milk more premium revenue out of Pandora.
Too many people enjoy Pandora as a free ad-based service, and that's getting in the way of the streaming speedster's consistent profitability.

It isn't like Spotify, which recently announced that it now has more than 5 million paying subscribers.

Well, Sirius XM could change that. Instead of reinventing the wheel with a music discovery service that will likely be inferior to Pandora based on reasoning alone, Sirius XM could grow its streaming subscribers by making Pandora its included personalized radio platform. The end result is more revenue.

3. Sirius XM has billions in tax loss carryforwards.
One of the selling points for Sirius XM now that it's profitable is that it doesn't have to pay much in taxes. It has amassed billions in net losses in prior years that can be used to offset taxable gains now. With Sirius XM's ability to improve on the premium revenue at Pandora -- transforming it into the consistently profitable company that it should have been all along -- pre-tax earnings will be more valuable at Sirius XM.

4. It would consolidate the ad sales teams.
Pandora's grown adept at selling online ads, and Sirius XM's growing base of paying subscribers makes it an attractive draw for advertisers. The two Rolodexes combining would be a potent thing.

Advertisers would welcome Sirius XM as a one-stop shop to reach both offline and online listeners, and that can only drive rates higher.

5. Karmazin's leaving.
Karmazin may have publicly dissed any potential buyout candidates, but his replacement will take over in less than two months.

New leadership may prove to be more warm for Pandora.

Liberty Media -- with majority control -- has a history of taking a liking to category killers in the media industry. Pandora has to be attractive at some level.

6. There are opportunities for cross-promotion.
One can argue that satellite radio listeners and fans of customized streams are different critters, but it's ultimately all about the pursuit of eardrums. Pandora would be able to promote the content on Sirius XM, perhaps even offering limited branded channels from time to time.

7. When Apple comes, two heads will be better than one.
Apple's arrival is something that Pandora investors are obviously fearing, but it's not as if Sirius XM doesn't have anything to worry about.

Apple isn't the leading seller of music in the country by accident. If it sees streaming as a lucrative service -- and there are already a growing number of cars that take advantage of Apple's Bluetooth connectivity to stream through dashboards -- Sirius XM will need to respond to Apple's threat.

Having Pandora's 59.2 million active listeners on its side when the battle begins will help for when the battle intensifies.

Running of the bulls
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The article 7 Reasons Sirius XM Should Buy Pandora originally appeared on Fool.com.

Longtime Fool contributor Rick Aristotle Munarriz owns shares of Liberty Media. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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