Why Pandora Shareholders Might Vote Against the Acquisition

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It was announced on Monday that Pandora Media Inc. (NYSE: P) would be acquired by Sirius XM Holdings Inc. (NASDAQ: SIRI). While this deal might look good at first glance, one analyst believes that Pandora shareholders will shoot down any acquisition hopes.

Wedbush reiterated an Outperform rating for Pandora with a $10 price target, implying upside of 10% from the most recent closing price of $9.09.

The firm believes that while additional changes are still necessary to reinvigorate profitable growth, it believes that Pandora can achieve break-even adjusted EBITDA profitability in late-2018. Wedbush doesn’t expect Pandora shareholders to approve the acquisition by Sirius as currently contemplated by the two companies, given a significantly lower purchase price per share than originally envisioned by Sirius and Pandora. As such, the firm believes that the terms of the deal must be revisited, or a deal may not happen at all.

As for the terms of the deal, this is an all-stock transaction valued at roughly $3.5 billion. Pandora shareholders will receive a fixed exchange ratio of 1.44 newly issued Sirius shares for each share of Pandora they hold. Based on the 30-day volume-weighted average price of $7.04 per share of Sirius common stock, the implied price of Pandora common stock is $10.14 per share, representing a premium of 13.8% over a 30-day volume-weighted average price.

Considering that the exchange ratio is fixed, the sell-off in Sirius shares in Monday’s trading session (to $6.26, down 10.3% for the day) implies a deal price of $9.01 or so, which is a discount of 0.8% to Pandora’s closing price on Friday of $9.09. Wedbush thinks that shareholders will reject the deal as inadequate and will require the terms of the deal to be renegotiated. The agreement includes a “go-shop” provision that allows Pandora and its board of directors to explore other proposals.

Ultimately, Wedbush believes that a combination of Pandora and Sirius makes a lot of sense:

The deal would combine a leading satellite broadcast radio provider with a leading Internet-based radio provider, with customer bases that have limited overlap. SiriusXM would benefit from Pandora’s user base, streaming expertise, and technical acumen, while Pandora would benefit from SiriusXM’s superior financial footing, subscription expertise, and OEM relationships. SiriusXM could leverage Pandora to grow its user base beyond its current vehicle sweet spot. Pandora’s service would enhance the interactivity of the combined company’s product portfolio through on-demand radio and greater customization of the listening experience. In addition, Pandora also has a well-developed advertising sales business.

Shares of Pandora were last seen at $9.08, with a consensus analyst price target of $9.20 and a 52-week trading range of $4.09 to $10.07.

Sirius traded at $6.28 a share, in a 52-week range of $5.17 to $7.70 and with a consensus price target of $7.02.