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The Pandora Bubble Has Burst–Will Free Streaming Be Next?

December 3, 2015

If you’ve been watching Pandora lately, you’ll see four high level decisions that smack of desperation:  Executives cashing out, bear hugging overhead with offices in major markets, bizarre acquisitions for even more cash, and now–DEBT!

That’s right, after burning through the shareholders money, they are not doing another follow on public offering of stock.  Why?  My guess is that it’s primarily because they couldn’t find another underwriting syndicate to take out another round of publicly traded stock.

The notes will be unsecured, senior obligations of Pandora, and interest will be payable semi-annually in arrears. [At the 2020 maturity date t]he notes will be convertible into cash, shares of Pandora’s common stock, or a combination thereof, at Pandora’s election. The interest rate, conversion rate and other terms of the notes are to be determined upon pricing of the offering.

Also known as junk bonds.  But Pandora employees should note that there’s essentially another $300 million of dilution if the bond offering doesn’t bust.  What does that mean?  At yesterday’s closing price, $300 million of debt would convert into 21,023,125 shares of common stock which is about 10% dilution based on Pandora’s shares outstanding.  (Of course, if the downward trend in Pandora’s stock continues, it will drive up the number of shares if the debt converts.)

That dilution could occur any time between the closing of the offering and 2020 when the notes mature.

Rather than sticking to their knitting and leveraging the compulsory license they enjoy from artists (and the may-as-well-be-compulsory license Pandora gets from songwriters), Pandora is creating acquisition integration problems (and costs) for itself and using mostly cash to do it–over $300 million so far.

Let’s be clear–according to their financial statistics, Pandora earns over $1 billion a year in “top line” revenue (total money into the company), but has never turned a profit.  They are sitting on $360 million in cash (or they were).

I would be willing to bet that you could take a few recent MBAs and find a team who could take over  a public company with those numbers and make a profit.  Big hint:  Don’t office in the most expensive cost-of-living and office rent cities in the world.  Try Omaha, it works for Warren Buffett.

 

 

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