Satellite radio group SiriusXM has agreed to purchase internet music service Pandora Media in an all stock deal valued at $3.5bn.

Pandora stockholders will receive 1.44 new shares of SiriusXM for each share of Pandora they currently hold, worth roughly $10.05 based on Friday’s closing price.

The combined group is expected to have annual revenues of $7bn, the two companies said. The deal provides Pandora’s management and board the opportunity to actively solicit alternative takeover proposals, although the company said it could not ensure that a superior offer for the internet radio group would be made.

Executives said they expected to offer SiriusXM programming, which includes popular radio personalities like Howard Stern, on Pandora as part of new audio packages, while also seeking to bolster Pandora distribution in cars. SiriusXM last year agreed to a buy a stake in Pandora.

“The addition of Pandora diversifies SiriusXM’s revenue streams with the US’s largest ad-supported audio offering, broadens our technical capabilities, and represents an exciting next step in our efforts to expand our reach out of the car even further,” said Jim Meyer, the chief executive of SiriusXM.

The acquisition comes as a crowded field of online and app-based music providers seek to win over subscribers. Apple and Spotify have both amassed millions of paying subscribers, providing a boon to the music industry.

SiriusXM shares fell 3 per cent in pre-market trading in New York to $6.76, while Pandora rose more than 8 per cent to $9.83.

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