Pandora Steps Up Hunt for Buyer, Gets $150 Million From KKRBy
Losses, tepid outlook for music service raise pressure to act
Looming payments to record labels threatened cash crisis
Pandora Media Inc., struggling with widening losses and a tepid outlook for its online music business, is shaking up its board and stepping up efforts to find a possible buyer.
KKR & Co., the private-equity firm, is investing $150 million in Pandora, according to a statement Monday. Two directors will leave and the company will create a new independent board committee that plans to seek new members. Richard Sarnoff, who oversees KKR’s media and communications holdings in the Americas, will join the board as well.
The fast growth of Spotify and Apple Music, along with the billions of dollars Amazon and Google are investing in music, have pressured Pandora to expand beyond its roots as an internet radio company and become a streaming service seeking paying subscribers. It also has gone into ticketing and artist services. Investors such as the hedge fund Corvex Management LP are questioning that strategy and urging a possible sale because of losses and a tumbling stock price.
While bolstering Pandora’s balance sheet in the near term, the KKR investment may increase the prospects of an eventual sale, several analysts said Tuesday. Laura Martin, an analyst at Needham & Co., said the infusion may add $5 a share to the stock’s value over time, giving the internet radio pioneer a financial safety net in addition to new board expertise, which will “open many acquisition doors.”
CNBC’s David Faber depressed merger chatter when he said that a sale is less likely after the investment, citing people familiar with the matter. That sent the stock down as much as 3.6 percent to $10.03 in New York Tuesday. The company, which went public at $16 a share in June 2011, traded as high as $40.44 in 2014.
“Their balance sheet was deteriorating and they were at risk,” said Rich Greenfield, an analyst at BTIG LLC.
Pandora has said it can add customers because the market for paid streaming is still in its infancy. Yet more than 100 million people around the world are already paying for a music service of some kind, including more than 20 million people in Pandora’s home market. The company held out the possibility Monday it could find a buyer in the 30 days before the KKR investment closes.
Pandora introduced its paid service later than expected and won’t generate significant revenue from subscribers until the second half of the year, Chief Financial Officer Naveen Chopra said on a call with investors.
The company’s cash and short-term investments have dwindled to a little over $200 million from $382 million two years ago because of acquisitions and ongoing losses, and Pandora faced looming payments to major record labels that could have triggered a crisis, according to Greenfield. The company declined to comment Monday.
Under the agreement, KKR will purchase $150 million in a newly designated Series A convertible preferred stock. The stock will yield at least 7.5 percent and is convertible into common stock at $13.50 a share. Pandora also has the option to increase the investment to a total of $250 million.
Corvex, which holds almost 10 percent of the stock, has urged Pandora to improve its performance or sell. Sirius XM Holdings Inc., the satellite-radio provider controlled by billionaire John Malone, has sometimes expressed interest in doing a deal for Pandora, though executives have downplayed their desire for a merger on other occasions.
Oakland, California-based Pandora said after markets closed Monday its first-quarter loss widened to $132.3 million while revenue grew 6.3 percent to $316 million, shy of analysts’ estimates. The loss of 24 cents excluding some items was smaller than the 34-cent average of analysts’ estimates.
This quarter, the company forecasts a loss of $50 million to $65 million before interest, taxes, depreciation and amortization. Analysts were predicting a loss of $15.7 million on that basis. Revenue will be $375 million at most, the company, said, missing analysts’ forecasts of $390 million.
As part of the board changes, James M. P. Feuille and Peter Gotcher will resign. Timothy Leiweke, an independent director, will form a new committee to identify and appoint new directors. Centerview Partners LLC and Morgan Stanley will continue to advise the board on strategic alternatives.