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Pandora Gives Itself a Month to Sell the Business

The online radio company that only recently decided to join the highly competitive on-demand music streaming business, has announced that private equity firm KKR is willing to invest $150 million in exchange for convertible preferred stock and a board seat.

It also announced that venture capitalist James M. P. Feuille and technology investor Peter Gotcher will resign from the board making way for a new committee that will appoint new directors.

Importantly, Pandora P has a month to shop itself, and if it’s successful, the new owners may choose not to take KKR’s money, in which case they’ll have to fork out $15 million to sever the deal. If not, they’ll be saddled with dilutive securities (conversion price $13.50 a share compared to Pandora’s current price of under $10 indicates premium to current price so that’s sort of a positive).



Buyout Rumors

Roughly a year ago, Liberty Media’s LSXMA streaming company Sirius XM Radio SIRI offered Pandora $3.4 billion or $15 a share that Pandora turned down. CEO Greg Maffei is disenchanted with the stock now because he doesn’t think Pandora did justice to the ad-supported model (the company wasn’t making enough money on that, so was forced into the more competitive Premium market).

Sirius’ intentions aren’t clear at this point, but its management says it’s considering setting up a proprietary ad supported business, which is easier said than done. The two businesses would have complemented each other nicely, but they obviously can’t agree on a price. The KKR deal may be an attempt to force Liberty Media (or other prospective buyer) to get done with it.

Pandora’s Financials Don’t Look So Good

The revenue decline in the seasonally softer first quarter of 2017 was steeper than it has been in the two preceding first quarters, so it also dragged the gross profit lower. Operating Expenses (R&D and SG&A) have been rising consistently over the past three years though they stabilized in 2016 and dropped in the last quarter.

In mid-January, Pandora announced a 7% reduction in its workforce, possibly to make it more attractive for a buyer. Net income before non-recurring items shows a downtrend over the last three years even as the share count has continued to increase. The company raised debt toward the end of 2015, adding interest expenses to its already strained income statement.

What’s more, cash burn continues with the balance sheet cash shrinking for the fifth straight quarter. Also, in the Premium segment, Pandora is pitted against companies like Apple AAPL and Spotify which have 30 million+ songs while Pandora has just around a million. Alphabet's GOOGL YouTube and Amazon AMZN are other giant technology companies with stakes in this market. So it badly needs cash infusion or a takeover by a much larger player.

Worst of all: Number of active listeners is down from 81 million in the previous quarter to 76.7 million in the last quarter. As a result, listener hours dropped sequentially from 5.38 billion to 5.28 billion. The only silver lining is that cost per paid subscriber was $2.96 compared to $3.12 in the previous quarter.

Bottom Line

Pandora needs to sell itself and the KKR announcement is likely designed to precipitate matters.

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