Pandora Has to Face the Music
Oh, how Greg Maffei taunts Pandora Media Inc.: We'd buy the company -- I mean, not at this price -- but we'd buy it, wink.
That sums up his latest public stance on the online radio company. And so Pandora's stock is stuck in a pinball machine, with intermittent takeover speculation the only thing keeping some shareholders from calling "game over."
Here's the predicament: Given Pandora's strapped finances and inferior competitive position, the company should sell itself. But there's really only one suitor out there, and that's Sirius XM Holdings Inc., by way of Liberty Media Corp., Sirius's current majority owner and potentially its future 100 percent owner. Maffei is chairman of Sirius and CEO of Liberty Media, while dealmaking titan John Malone is chairman of Liberty. They've made their interest in Pandora no secret, but there's a wide gap between what they'd be willing to pay and what Pandora founder and CEO Tim Westergren will accept.
Asked about a deal at an investor conference last week, Maffei stirred the pot:
I would buy Pandora if it were not $13. Do you want to sell it for $10? We probably will buy it. They aren't selling for $10.
In fact, $13 might not even cut it. Sirius reportedly made an offer of as high as $15 a share in 2016 that was rejected by Pandora's board. But Westergren is a member of the board who happens to be up for reelection in a couple of months. And the company's second-largest shareholder is activist hedge fund Corvex Management, which has been pressuring Pandora to sell itself. 1
Against this backdrop, the company on Monday launched Pandora Premium, Westergren's plan to take its higher-margin advertising-supported radio business that has about 81 million active listeners and supplement it with a low-margin subscription on-demand business that competes even more directly with larger rivals Spotify, Apple Music, YouTube, etc. Sure, given the higher average revenue per user that the on-demand model offers, it can be argued that there's bigger profit potential there. But that's entirely dependent on being able to take on the juggernauts without dishing out a ton of money to acquire customers. (By the way, not even Spotify, the global leader in paid music streaming with 50 million subscribers, makes money.) 2
Pandora isn't doing away with its free ad-supported radio product. The company thinks it can still grow that user base to 89.5 million by 2020, but this is a lofty goal. By increasing ad time, Pandora is making the product slightly less appealing and its number of active listeners has already declined since the end of 2014. According to a March 8 report by analysts from Pacific Crest Securities, when adjusting for "more reasonable targets," operating profit "quickly compresses to near zero on a non-GAAP basis and below zero on a GAAP basis." As it is, Pandora burned through $241 million of cash in 2016.
If Pacific Crest -- one of only two sell ratings on Pandora -- is right, the new Pandora may look pretty similar to the old Pandora, financially speaking. And that suddenly makes a takeover (or take-under) bid near $10 appear justified. Westergren may be holding out for something above Pandora's $16-a-share IPO price in 2011, but that's not going to happen and it's possible the stock never returns to that level on its own. Even now there's some takeover premium baked into Pandora shares, which ended last week at $12.13 apiece.
Without getting too many steps ahead, the idea put forward by BTIG Research's Brandon Ross that Pandora could be the "linchpin" for a three-way deal with Liberty's Sirius and Live Nation Entertainment Inc. is an interesting one. It would create the one-stop-shop music company that Westergren envisages for Pandora but that Pandora is unlikely to do successfully on its own. It's already overpaid for one acquisition, concert-ticker seller Ticketfly, in a step toward this goal.
Pandora needs to take seriously the notion of selling itself -- and that includes an offer from Malone's clan if that's the only bidder. But Westergren should be prepared to lower his expectations on price.
The deadline for Corvex or other investors to propose board changes at the annual meeting is March 17.
Pandora Premium, which will cost $9.99 a month, isn't even that much of a differentiated product. The main selling point is using the "thumbs up" data Pandora collects so users can just tap a button that adds songs similar to the ones already in their playlists. It's a neat feature but a) that may not be enough to cause people to switch from another service and b) again, the marketing and customer-acquisition costs will be high.
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