Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

A sale of Pandora -- why didn't anyone think of that?

Oh right, they did, and the conclusion was this: A) Pandora isn't a must-own asset, especially given that the most fitting suitors are some of the same companies now eating the online radio service's lunch, and B) selling the $2.3 billion business doesn't exactly fix its problems. 

Shares of Pandora have dropped more than 40 percent since last May and are trading near a three-year low. When something like that happens, wishful investors tend to float the idea of a takeover, the magical cure-all for troubled companies that they think for some reason still deserve fat takeover premiums. As for potential bidders, it's always the usual suspects -- Google, Amazon, Apple and Microsoft -- the same ones that people think are going to buy every tech-related business in the world and yet have rarely ever made large acquisitions. 

Low Notes
Many analysts have remained bullish on Pandora, whose first-quarter results did have slivers of good news, such as a pickup in listener hours. But as MKM Partners put it, the positive signs were "against a low bar."
Source: Bloomberg

But never say never. Pandora has a notable activist shareholder in the ranks now. On Monday evening, Keith Meister's Corvex Management disclosed an increased stake in Pandora (nearly 10 percent) and said it should "immediately explore the potential value to shareholders that could be realized in a sale transaction." 

Pandora was said to have already hired Morgan Stanley to help it reach out to possible buyers back in February. But the following month, its co-founder Tim Westergren returned to the CEO role and made remarks that gave the strong impression he plans to keep Pandora independent. That wasn't welcome news for Corvex, whose stake had been worth more than $50 million at the time. 

"Westergren's public statements suggest he has no intention of comparing alternative options such as a sale with the company's current strategy, which contradicts our understanding of the board's openness to all paths to maximize shareholder value based on our previous conversations." - Meister

The reason the sale path is attractive, even with the stock at these depressed levels, is that Pandora is forging down a costly road of expanding into adjacent businesses (more on that below). Shareholders would probably prefer to see it get bought than take that gamble. And it's not like Pandora would be a big acquisition for the likes of a Google. As Gadfly's Shira Ovide and Gillian Tan have pointed out, buying Pandora would only cost a small fraction of the cash held by any of the tech titans. And as they wrote, it could be "a nice add-on" to YouTube, for example.

Tiny Target
It's not clear whether any of the tech giants would want to add Pandora to their music-streaming assets. But they certainly can afford to:
Source: Bloomberg

The alternative is keeping the company independent and seeing how Westergren's strategy plays out. What's made Pandora different from rivals such as Spotify is that it operates more like a radio, using algorithms to guess users' tastes, rather than letting them choose their playlists song-by-song and store them on their devices. Pandora is now finally expanding into on-demand streaming, but is obviously late to the game, as tech giants like Apple have already done so. And as Shira Ovide explained, the music industry hates Pandora, which will make it really tough (read: expensive) for Westergren to now have to negotiate individual song-licensing deals.

The business is already hurting from the huge chunk of revenue that goes to royalty fees, the way it currently pays to stream artists' music. Operating losses totaled a record $231 million for the past 12 months. Pandora is also branching into concert promotion and ticket sales, with its purchase of Ticketfly in November for $450 million, which Corvex called a "rich" price and said could be interpreted as "a belated admission that growth in the core ad-supported internet radio business has stalled."

Tuning Out?
Users spent more time on Pandora in the first quarter, helping revenue to beat expectations and offset concern over the mounting losses.Here's year-over-year growth in users and how long they're listening:
Source: Pandora filings

If Corvex can get Pandora back on the sale route and have it result in a premium for shareholders, then great. But, just like many of Pandora's users, the activist fund may have trouble getting what it wants. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Westergren, a musician himself, sort of took a backseat in 2004 by relinquishing his CEO title to instead serve as Pandora's liaison to the music industry and listeners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net