Spotify Said to Consider a Direct Listing, Not an IPO, When It Goes Public

Courtesy Photo
Purple Spotify ads, which seem to confirm that Prince music will be available on major streaming services soon, appeared in New York's Union Square subway station on the morning of Jan. 30, 2017.

With a licensing deal with Universal Music under its belt -- and negotiations said to be ongoing with the two remaining majors -- Spotify is reportedly ready to take the plunge and go public, with a twist. 

According to the Wall Street Journal, the music streaming leader is "seriously considering" a direct listing of its shares on a public exchange, rather than a traditional IPO. Such a listing would spare Spotify from having to raise any new money before going public. Unsurprisingly, Spotify declined to comment on the report.

Earlier this week, the company announced a long-term licensing deal with UMG that sets royalties in a way that lets Spotify reduce its payments to the label if it hits certain revenue targets. The deal also gives Universal acts the option to make new albums available only to paying subscribers for the first two weeks of release.

By locking in a deal with UMG, Spotify has removed a significant barrier to going public. Valued at $8.5 billion, the company is under pressure to go public soon or face financial penalties under a year-old debt deal.

Who Wins, Who Loses in Spotify's Deal With Universal

How is a direct listing different than a traditional IPO? According to a 2010 white paper by Keating Capital:

Unlike the IPO, which combines a public offering and an exchange listing in a single step, the direct listing separates the going public process into two discrete steps -- an exchange listing and a subsequent follow-on or alternative registered offering. The direct listing process provides a relatively quick, certain and cost effective way to get access to these capital raising options -- all of which can be completed using what is known as a shelf registration -- where shares are SEC registered in advance and then sold "off the shelf" when market conditions are most favorable.

As previously reported, Spotify is also in negotiations with Warner Music Group and Sony Music Entertainment, as well as independent labels. Locking in a deal with at least one other major would make going public easier for the company.

"They are trying to reduce the headline rate [from which royalties are calculated], and we are looking for ways to make sure we don’t lose revenue," an industry executive with knowledge of the negotiations told Billboard this week. "In a good deal, both sides would share in the upside and also shoulder the risk of the downside."