Detwiler Fenton Negative On Pandora; Sees Value Eroding As Other Players Enter The Space

Detwiler Fenton said Pandora Media Inc (NYSE: P) should have accepted the takeover offer from Liberty Media Group (NASDAQ: LMCA) amid ongoing value erosion and entry of new players such as Spotify and Apple Inc. (NASDAQ: AAPL).

M&A Talk Muffled

Recently, the Wall Street Journal reported that Liberty Media floated an offer to acquire Pandora for roughly $15 a share, several dollars above where the shares traded at the time. Citing people familiar with the matter, the Journal said the offer valued the company at over $3.4 billion.

But, Pandora's board rebuffed the advance because it believed the company's true value was closer to what it was in the fall, when the stock traded around $20.

Related Link: Morgan Stanley More Convinced Pandora Can Secure Broad Rights Without Giving Up Core Economics

The combination would have been great as Liberty Media, which among other things owns Sirius XM Holdings Inc. (NASDAQ: SIRI) and Live Nation Entertainment, Inc. (NYSE: LYV).

"We suspect that this is the best offer that Pandora will get in its current state. Furthermore, we see a high potential of ongoing erosion of value as more players with much bigger balance sheets move in to take the market down its logical evolutionary path," analyst Alex Arnold wrote in a note.

Future Growth

Pandora's growth lies outside the United States and it needs content, which expensive. The analyst noted that the loyal listener base of Pandora is declining.

Further, listeners and listener hours are continuing to drop and as new entrants like Spotify and Apple making inroads, the road will be only tougher for the internet-radio company. Both these firms are providing attractive user experience and targeting Pandora's users.

"In our view, P needed to change the model before others had stormed into the market. Now, we suspect that finding a good sized lifeboat may be in order. Offers like Liberty's may not come along too often. The next one might be even less attractive to the Board," Arnold highlighted.

Related Link: Axiom: Buy The Post-Earnings Weakness In Pandora

Arnold said Pandora could build content relationships, flip to a paid service and unlock access to the international market. The analyst is also wondering how the how the acquisition will fair.

"After last week's 35 percent implosion of the shares, some investors are wondering if there is value here, to which we'd say probably not enough without changing things up," Arnold added.

At the time of writing, shares of Pandora were down 0.84 percent to $13.06.

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