Pandora Could Be The Key To Unlocking Liberty's Goal Of Combining Sirius XM And Live Nation

BTIG said Pandora Media Inc P could play a key role to the goal of Liberty Media Group LMCA combining Sirius XM Holdings Inc. SIRI and Live Nation Entertainment, Inc. LYV.

Internet radio Pandora has 80 million MAUs and 45 minutes of streaming per user daily, but the problem is leveraging that user base.

A Unique Solution

Analyst Brandon Ross noted, "Since an activist wrote a letter to the Pandora Board encouraging a sale process about a month ago, the company that has appeared to have the most interest is Liberty Media." Liberty owns 64 percent of Sirius and has 35 percent stake in Live Nation.

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In addition, Ross surmised Liberty would not only like to control Live Nation, "but would like to eventually combine Sirius and Live Nation into one single music distribution company."

"We believe that Liberty will ultimately take control of Sirius in some way. Given the current LSXMA discount to SIRI, that path may take a little longer than Liberty had hoped. But it should happen at some point," Ross elaborated.

Ross shared the belief that in the past, Liberty has encouraged Sirius XM to try buying Live Nation, but the latter had resisted those efforts saying strategic benefits in the proposed merger are lacking.

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"Sirius and Live Nation together would offer end to end distribution of music. There would be marketing opportunities and some extension of data. However, we do not believe that there would be nearly the level of synergy as there is between Pandora and Live Nation," Ross highlighted.

The Different Companies

The differences between Pandora and Sirius "make Pandora more interesting in unlocking value in a combination with Live Nation," according to the analyst. Following are the rationale behind the potential Pandora/Live Nation merger.

1. "Pandora is ad supported.
2. "Pandora creates more powerful data, as it is IP based and has a feedback loop.
3. "Pandora has much more listener scale (and importantly mobile scale).
4. "Pandora could benefit more directly from Live Nation's influence."

Media reports have said Liberty may pursue an acquisition of Pandora through Sirius XM, but the analyst noted, "Liberty could also try to buy Pandora on its own, along with its other music-­related assets."

"While SIRI and LYV together might not create great synergy, we believe that SIRI and P together create a little more and that LYV and P create a lot more than that," Ross continued.

On the last earnings call, Tim Westergren laid out his plans for Pandora, explaining that he wants Pandora to be a place where "listeners and artists engaging and transacting on one centralized platform, a service that unifies the entire music experience, radio, on­demand, live performance and artist or band connection on every device in every car, in every location, music where and how you want to hear it."

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Ross said it's possible the above is Liberty's long-term vision as well, and Pandora is the linking factor for Liberty to realize maximum benefits from Sirius and Live Nation.

"And Westergren's Pandora is the lynchpin in making it happen for Liberty, with end to end scale that Westergren could never achieve," Ross added.

Risks Ahead

However, Ross said there are "two key stumbling blocks" ahead of Liberty gaining control of Pandora. First, Pandora seems "to have no interest in selling at these levels." Second, until Liberty controls all of Sirius, Sirius is likely to prefer "harvesting cash from its legacy business" versus the "risk/reward of building a broader music distribution company." Finally, "Live Nation does not appear to have interest in merging with anyone."

Although the potential deal looks far from reality in the near term, it could be a win-win situation for all parties involved.

The three companies could act as a powerful end-to-end music distribution platform from live music to streaming music and radio. "Such a company would also have significant control over artists and labels and be able to act as an extended flywheel with many ways to monetize," Ross elaborated.

In addition, Sirius XM's consistent free cash flow could be used to make this platform global.

"If the combined company wanted to launch on demand streaming, it could do so," Ross noted.

Shares of Pandora closed Wednesday's regular trading session at $11.76, while Live Nation closed at $23.73. Sirius XM ended Wednesday's trading at $3.95, with Liberty Media closing at $18.55.