Why the Pandora Investment and Merger Saga May Be Far From Over

The long saga regarding Pandora Media Inc. (NYSE: P) has finally come to a head. Well, maybe. Rather than KKR & Co. L.P. (NYSE: KKR) investing $150 million, Sirius XM Holdings Inc. (NASDAQ: SIRI) will be investing up to $480 million in the streaming music rival. With its ticketing unit sale taking place as well, it might seem that Pandora is getting a great deal and helping to bolster its books.

Unfortunately for Pandora’s shareholders, they have some real reasons to feel disappointed after Friday’s big news. There is also a reason to feel as though the saga here is still not truly over and done with.

Pandora has tried to keep a higher share price through thick and thin. What has helped to drive shares lower is that Pandora has lost money on its business model long enough. Most would-be acquirers simply will not chase endless losses with more and more money. Its new subscription service does actually come with upside potential, but one scare that will not go away is that Pandora faces a heavy slate of competition with deeper pockets.

Pandora showed on Friday that the company is further bolstering its balance sheet as Eventbrite is going to acquire Pandora’s Ticketfly. The sale price for this ticketing business was shown to be $200 million, via $150 million in cash and $50 million in a promissory note. That was much lower than the $450 million or so original price that was originally reported back in 2015.

Pandora is going to have to use some its existing or new capital to pay KKR for its time and effort, even though KKR did not actually invest in Pandora. After all, KKR is entitled to a $22.5 million termination fee.

As far as the breakdown of that $480 million investment, it will be in newly issued Series A convertible preferred stock of Pandora. Sirius purchased $172.5 million of Series A preferred stock upon execution of the deal, and it will purchase the balance of the Series A preferred stock at a second closing. The Series A preferred stock will represent a stake of 19% of Pandora’s currently outstanding common stock and a 16% stake on an as-converted basis. Those Series A preferred shares are convertible into common stock at a purchase price of $10.50 per share, and the shares will bear a 6% cumulative dividend.

Another closing issue that complicates the finality here is that the investing agreement is subject to antitrust approval and other “customary conditions.” It is also not expected to close until or by the fourth quarter of 2017. This leads to a scenario in which investors in Pandora could face a zombie mode until then. The official press release stated clearly that this agreement may be terminated by either party if closing has not occurred by February 1, 2018.

What if Pandora’s performance gets even worse? Could Sirius walk away? Could they demand a better (lower) conversion price?

To cloud the matter further, what if the regulators remain tough on what they deem to be mergers already involving monopolies? Sirius is not doing an outright acquisition, but by getting the board chair seat and taking other board seats it could be viewed that Pandora will just become a pawn of the Liberty-Sirius XM empire. It is very possible that regulators might view this as a backdoor takeover. Go way back to when Sirius merged with XM. That was not an easy regulatory approval by any means, and it came with long-term conditions on pricing.

While Pandora’s $10 per month streaming music service is growing, it is a crowded space and competitors like Apple and Spotify are formidable foes. Spotify is privately held and its finances are not as public as the others, but Apple can spend money at an exponential rate over Pandora without even noticing it. Then there is Amazon and a slew of other media giants that could also easily outspend Pandora, and if they wanted to acquire Pandora rather than to compete with it they could have paid up if they chose to.

Sirius will effectively own 19% of Pandora, and its will be restricted from buying more shares for 18 months and will not own more than 31.5% of Pandora without its permission. Sirius will also get to name three board members for Pandora and one will become board chair. By taking a minority stake, any losses at Pandora will remain its losses, rather trickling down into Sirius and Liberty.

CNBC’s David Faber noted that discussions between Sirius and Pandora had gone back and forth for months. His reporting sources indicated that Sirius was willing to acquire the company outright, but only at $8 per share.

Shares of Sirius closed down 3.7% at $5.20 on Friday, in a 52-week trading range of $3.74 to $5.53. Its consensus analyst target price from Thomson Reuters is $5.21, and its market cap is over $24 billion.

Liberty Sirius XM Group (NASDAQ: LSXMA) shares closed down 3.8% at $40.25 on Friday, in a 52-week range of $29.26 to $43.32 and with a consensus target price of $46.47.

Pandora shares were up only 1.2% at $8.52 as of Friday’s closing bell, with a $2 billion market cap. Its stock was up at $9.00 at the peak on Friday, but the current price remains rather disappointing compared to recent months and versus when Pandora was up for sale. Its shares hit a 52-week low this past week going into the expiration of the KKR investment date, and its 52-week range of $8.14 to $14.98 might sum up the excitement (or lack thereof) here.

Maybe the news isn’t all bad for Pandora. After all, it will get a massive injection of capital, as long as the deal closes as it was worked out. Still, it is ever harder to view the outcome after the past month as a victory for Pandora shareholders. Not only did the shareholders not get a premium buyout to make them whole in their investment, Pandora’s stock hit a 52-week low while some deal-related uncertainty remains in place.

The saga over Pandora’s investment and would-be merger feels far from over.