An acquisition by Sirius XM Radio (SIRI - Get Report) of streaming music service Pandora Media (P) would "single-handedly resolve" the satellite radio operator's digital strategy, add advertising sales and boost its multiple, according to Macquarie Research analyst Amy Yong.
Shares of Pandora jumped 12% on Friday to $13.33 following a report from CNBC that it was "in the very early stages" of selling itself to Sirius XM. John Malone's Liberty Media (LMCA) , which owns a 66% stake in Sirius, approached Pandora earlier this year about a sale but was rebuffed, according to news reports.
Sirius stock closed at $4.30 a share, off by 5.6% on Friday following the CNBC report. In pre-market trading on Monday, its shares were flat.
A Liberty Media spokeswoman had no comment. A Pandora spokesperson on Friday said the company does not "comment on rumors or speculation."
"Pandora would future proof Sirius XM's business model," wrote Yong, who rates the satellite radio company outperform with a target price of $4.85 a share. Grabbing Pandora's large active user base and ad sales alone would boost her target price to $5.50 a share, she wrote in a report Sunday night.
Yong, who rates Pandora outperform with a $14 price target, says Sirius would benefit from controlling Pandora's 78 million active users, who represent approximately 10% of U.S. radio listening and 55% of music streaming hours.
Liberty Media would also add financial muscle to Pandora, which intends to increase its reach to 100 million active users by 2020, the analyst reasons. In its most recent quarter, Pandora lost $61.5 million on revenues of $351.9 million.
"The best near-term opportunity would be for the combined company to grab its fair share of AM-FM (radio)" advertising, Yong wrote. She figures that Pandora's 10% of annual U.S. radio ad sales would amount to about $1.5 billion.
The analyst also estimates that a combined company would have synergies of roughly $200 million over time.
In a report in early November, Yong had postulated that a merger between the two companies would enable Liberty Media, which also owns a 34% stake in concert booking and ticket company Live Nation (LYV - Get Report) , to create a company that could compete with the likes of Apple (AAPL - Get Report) , Amazon (AMZN - Get Report) and Alphabet (GOOGL - Get Report) .
"The combination of Sirius XM's 30+ million subs, Pandora's 80+ million active users and Live Nation's 70 million+ fans could be a music powerhouse," she wrote in the earlier report.