Pandora’s revelations this week (May 8) that it had both raised $150 million in investment capital from private equity firm KKR, and was shaking up its board of directors — as well as forming an independent committee chaired by former AEG CEO Tim Leiweke to identify new board members — in order to investigate a potential sale caught plenty in the music industry by surprise.
The company, which rolled out its long-awaited on-demand streaming service widely just last month, had been caught up in acquisition rumors for the better part of the past year, but its leadership has repeatedly insisted the company would not be sold.
But the new announcements, which arrived in tandem with Pandora’s 2017 first quarter report, changed the narrative around the company, which launched its internet radio service in 2004 and went public in 2011. With new investment and a new outlook on its future, where does Pandora go from here?
Right away, the $150 million investment from KKR, which is still subject to regulatory and other approvals but is scheduled to go through in June, gives Pandora some breathing room amid widening losses and pressure from board members to sell — at least right away. Pandora lost $132 million on revenues of $315 million in the quarter ended March 31, which matched increased losses ($115 million) and revenues ($297 million) from the corresponding period in 2016; essentially, as Pandora generates more money, it’s also losing the corresponding amount. But the investment increases Pandora’s cash on hand to just shy of $350 million, and gives it the cushion it needs to give its on-demand service time to pick up traction.
The company has been streamlining its operations of late as well; in January, CEO Tim Westergren announced it would lay off seven percent of its 2,000-strong workforce, or some 100-150 people, with the goal of making it “more focused.” Yet it’s still dealing with a stock price that has declined some 71 percent since a 2014 high of $37, and is currently trading around $10 per share. If it can show consistent progress in both attracting users to its $9.99/month on-demand streaming tier, and in converting existing users from its free ad-supported radio to its $4.99 ad-free subscription radio offering, the pressure will subside for now. A 20 percent year-over-year boost in subscribers, to 4.71 million to 3.93 million, has the company heading in the right direction.
Will Pandora Sell?
For a year now, Pandora has been linked to a sale to SiriusXM parent company Liberty Media; last July, the Wall Street Journal reported that Liberty CEO Greg Maffei had discussed an offer to buy Pandora for $15/share, which was rejected by Pandora’s board as too low. (Shareholders have also been urging Pandora to sell, both privately and publicly.) Earlier this year, Maffei reportedly lowered his estimation of Pandora’s worth, saying Liberty would no longer do a deal for more than $10/share, with one source telling Billboard that Liberty had plans to incorporate Pandora’s ad-supported tier into SiriusXM as a free option.
Now, the new investment likely means Maffei would have to pay a price dictated more by market forces than his own valuation. The investment doesn’t close for another 30 days, meaning Liberty has until June 8 to come to the table and cut a deal, but sources say that now seems unlikely.
But if not Liberty/SiriusXM, then who? Leiweke was brought in to chair the independent committee for a reason, and while outgoing board member James M. P. Feuille — who is resigning alongside fellow board member Peter Gotcher — left the door open to “strategic alternatives” that could make one unnecessary, he also specifically mentioned the possibility of a sale in the 30 days before the financing closes. There are no obvious strategic suitors, except for maybe Apple, which is sitting on a pile of money — $256 billion — that could be used to buy the competition and co-opt the choice pieces of Pandora’s assets and operation. (Apple declined to comment.)
But multiple sources have told Billboard that it appears that Pandora will remain a standalone company for now, and give on-demand a chance to make progress. Sources say that potential buyers besides Sirius are likely to hold their bids until they see how much traction the on-demand tier gets later this year, which could raise Pandora’s value.
What Does It Mean For the Music Industry?
The record industry has a vested interest in stoking competition among streamers, hoping to avoid the near-monopoly that Apple’s iTunes Store enjoyed over digital downloads after the turn of the century. And SiriusXM, operating under grandfathered royalty rates about which the record industry is less than pleased, would have annoyed labels and other stakeholders even further if it incorporated and promoted Pandora’s ad-supported service, which pays a much lower royalty rate than on-demand streamers do. Those two reasons alone led one label source to say that, in light of other possibilities, the announcements yesterday represented “the right outcome from an industry perspective.”
Still, there’s plenty of uncertainty that remains for Pandora, particularly over the next month as it finalizes the KKR investment and explores any sale opportunities that might come its way. But Pandora now has some semblance of short-term stability and freedom to continue down its path towards diversification beyond ad-supported radio and prove to its shareholders that the existing leadership can execute the vision the company has laid out. Whether Westergren and company can maintain control of Pandora in the future, or whether they are buying themselves time to improve their outlook for a more lucrative sale down the road, remains an open question.
Additional reporting by Ed Christman and Hannah Karp.