Cortex Management, the hedge fund run by Carl Icahn protégé Keith Meister, disclosed on Monday it has purchased enough shares in Pandora to make it the company's largest shareholder. In a cage-rattling letter to Pandora's board of directors, Meister said that Cortex now owns 9.9 percent and urged the streaming company to curb plans to diversify beyond ad-supported radio and explore a sale.
Meister gave a laundry list of reasons as to why the company should engage an investment bank and explore a possible sale, including declining share price, poor equity currency and "questionable" uses of capital, such as the $450 million purchase of ticketing company Ticketfly. He also complained of poor investor communication and criticized top executives, including founder/CEO Tim Westergren and president/CFO Mike Herring, for not owning more equity in the company.
"We believe the market is giving the company's current strategy a vote of no confidence, leaving shares 55% below their 52 week high despite the massive importance of the successful and fair conclusion of the Copyright Royalty Board (CRB) process in December 2015," he said. "Some market participants believe Pandora's expensive push into adjacent business lines reflects a belated admission that growth in the core ad-supported internet radio business has stalled, while others simply do not trust management to execute on future opportunities in a manner which creates value for shareholders."
The hedge fund manager also wrote that Pandora faces an uphill battle financially as it works to develop an on-demand component to its service to bring it in direct competition with the likes of Spotify and Apple Music, noting "many of whom do not need a music service to be a profitable business." The letter also predicted tough negotiations ahead for Pandora as it tries to secure on-demand rights from record labels.
Shares of Pandora rose 6 percent to $10.58 in early trading on Tuesday. Quick bump aside, the stock has dropped roughly 26 percent this year.
Cortex said that it was their "firm belief that the company should immediately explore the potential value to shareholders that could be realized in a sale transaction, and to evaluate the results of a fulsome sales process against other options including the risk-adjusted value of continuing to operate on a standalone basis."
They added that there is likely to be "significant strategic interest in the company" from potential buyers including large media companies, phone makers and other music companies. "Simply put, we believe Pandora can become an even more differentiated product and a more valuable business as a part of a larger enterprise," Cortex said.
Pandora said in a statement that the company is "on the cusp of realizing an extraordinary vision" and has a "profitable core business, combined with a strong balance sheet. We are confidently investing to fully capture the massive opportunity ahead of us." The statement assured that the company's senior management is in "constant dialogue with shareholders about our business strategy and committed to delivering results and long-term value."