Pandora Said to Explore Sale; Shares Fall as Losses Pile Up

Pandora Earnings Miss Estimates, Now Exploring Sale
  • Online radio provider's talks are said to be preliminary
  • Company contending with competition, fees from record labels

Pandora Media Inc., the largest Internet radio service, is exploring a possible sale, according to a person familiar with the matter. The shares fell close to an all-time low as some analysts lowered their price targets amid mounting losses and competition from Spotify Ltd. and Apple Inc.

The company is working with Morgan Stanley to reach out to buyers, said the person, who asked not to be identified discussing a private matter. The talks are preliminary and may not lead to a deal, the person said Thursday before the online-radio provider reported fourth-quarter earnings that missed analysts’ estimates. Pandora and Morgan Stanley declined to comment on a potential sale.

The stock fell 20 percent to $7.23 at 10:50 a.m. in New York. It slumped as low as $7.10 intraday, the lowest since November 2012, as several analysts, including some recommending the stock, reduced their price targets.

The Oakland, California-based company, which has been unprofitable each year since its initial public offering in 2011, is trying to grab advertisers from terrestrial radio while competing against Spotify and Apple and battling record labels and music publishers over how much it pays to play their songs.

Michael Pachter, an analyst at Wedbush Securities, lowered his target price on the shares to $15 from $26 while maintaining an outperform rating. He said in a note he sees investors “embracing” the company’s strategy once it begins showing signs of success. Daniel Salmon, at BMO Capital Markets, lowered his target to $10 from $11. He rates the stock market perform.

Quarterly Sales

The company reported fourth-quarter sales of $336.2 million, missing projections of $341.6 million, the average of analysts’ estimates compiled by Bloomberg. Profit excluding certain items totaled 4 cents, trailing estimates of 6 cents. This year, sales will be $1.4 billion to $1.42 billion, the company said, below analysts’ estimates of $1.467 billion.

Total listener hours, a closely watched measurement that investors see as an indicator of future profits, increased to 5.37 billion in the quarter, compared with 5.2 billion a year earlier. On the year, listener hours were 21.11 billion, a 5 percent increase from 2014. Active listeners totaled 81.1 million in the fourth quarter, compared with 81.5 million a year earlier.

Overseas Expansion

Pandora aims to increase sales by expanding overseas and introducing an on-demand service akin to those offered by Spotify and Apple. The company acquired assets from streaming service Rdio to build out its on-demand options. Pandora offers its existing radio service in the U.S., Australia and New Zealand, but would need to secure new rights to expand elsewhere. 

“We believe we can convert millions of listeners for paying services, by offering a truly differentiated easy-to-use and incredibly enjoyable experience,” Chief Executive Officer Brian McAndrews said on a call with investors. “We also believe having a broader offering will attract and retain even more listeners to our core Pandora radio business. There will be every reason for music lovers of all kinds to stay on Pandora.”

Pandora also laid out a five-year plan that projects the Internet radio business will grow to more than $2.4 billion in revenue. Live events, subscriptions and commerce can boost total sales past $4 billion.

At the close of trading Thursday, Pandora was valued at $1.94 billion, or about 193 times its projected earnings. A DealReporter article in 2014 cited Sirius XM Holdings Inc., Amazon.com Inc. and Google Inc. as potential buyers for Pandora, without saying where it got the information.

Pandora dodged the worst-case scenario in a ruling in December that set music-streaming rates below the amount sought by performers and labels. Internet-radio companies must pay rights-holders 17 cents per 100 streams under the U.S. Copyright Royalty Board’s decision, which runs from 2016 to 2020. Pandora, which had been paying 14 cents per 100 streams for its free, ad-supported service, sought a rate of 11 cents. The music industry wanted 25 to 29 cents.

Days after that ruling, Pandora reached licensing agreements with songwriting groups Ascap and BMI, cementing its access to more than 20 million songs for several years.

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