Pandora issued a follow-up press release today, after announcing yesterday that the company is issuing a $300-million debt offering to institutional investors. Pandora stock closed down 11.5% yesterday, and has inched downward another 2% this morning, nearing the year-to-date low of $11.51 per share.
As a backdrop, one important analyst raised its rating on P stock, and the Copyright Royalty Board (CRB) will this month issue new music licensing rates that webcasters pay to labels, clarifying Pandora’s finances going forward.
“The sale of the notes to the initial purchaser is expected to settle on December 9, 2015, subject to customary closing conditions, and is expected to result in approximately $292.7 million in net proceeds to Pandora,” the company said in a statement. The “initial purchaser” is finance house Morgan Stanley, which is managing the entire offering. So, next Wednesday Pandora will be $292-million richer, as Wall Street investors worry about debt notes potentially converting to stock shares upon maturity, which would dilute the existing pool of shares. Nobody with equity in a company likes to see that stake reduced through dilution, which is why it’s often considered bullish when a company buys back its own shares, concentrating the investing opportunity by removing a supply of shares.
Pandora announced that the conversion price would be $16.42 per share, a significant premium over this mornings price of $12.32 (as of this post).
Earlier this week the company received an investment upgrade from Raymond James analyst Justin Patterson, moving the stock’s rank up from Market Perform to Outperform, and assigning a share-price target of $17 — even higher than the conversion price of Pandora’s newly offered notes. In this strange collision of bullish and bearish indicators, Pandora stock has been flayed this week.
As we noted yesterday, Pandora is setting up for an immensely ambitious and challenging 2016, in which company execs have promised to build anon-demand service alongside the market-leading Internet radio platform, and expand into some number of non-U.S. markets. It is spending $75-million to acquire tech and IP assets from bankrupt Rdio, and claimed to have $180-million stashed in the bank for general expenses. Today’s announcement predicts that the new cash infusion will be used for “general corporate purposes.”
The imminent CRB royalty-rate decision puts all of this in a shadow of uncertainty. Investors have been nervous this entire year because Pandora’s cost of doing business next year has been, and still is, unknown. The CRB decision will illuminate things instantly. Pandora is the largest contributor of performance royalties to music labels, by far, accounting for at least 50% of SoundExchange collections from webcasters on behalf of labels and artists.