Shares of Pandora Media Inc (P) surged 5.0% ($1.20) to close at $25.19 (highest price since its initial public offering), after the Internet radio service provider announced the sale of 10 million shares in a new offering, which will fetch it approximately $231.0 million.
Pandora expects to use the proceeds for capital expenditure and working capital purpose. The company also intends to use a portion of the proceeds for making strategic acquisitions that will boost subscriber base. According to Bloomberg, music applications Songza and Raditaz can be possible takeover targets.
Pandora also announced that its biggest shareholder Crosslink Capital will sell an additional 4 million shares. Underwriters headed by JPMorgan Chase (JPM) have a 30-day option to purchase an additional 2.1 million shares, which will further boost the proceeds to approximately $280.0 million.
Pandora with more than 72 million active listeners continues to face significant competition from the likes of Apple (AAPL), Sirius XM (SIRI) and Spotify. The company recently announced that it expects advertising revenue growth to slow down and lesser listener hours in the near future, particularly due to increasing competition. Pandora expects to continue to report losses in the near term.
Pandora recently appointed Brain McAndrews, a former advertising executive as its chairman and chief executive officer. We believe that the latest share offering reflects a turnaround strategy implemented by the new leadership as the proceeds will boost liquidity. This will allow the company to invest in future growth initiatives, which may include diversifications to other profitable markets.
Although the stock sale by majority shareholder Crosslink may reflect dwindling interest in the business, we believe that the lower stake (stake reduces from 16.5% to approximately 13.0%) will help the new management to make more independent decisions.
Meanwhile, Pandora recently won a favorable judgment against some music publishers, who were trying to narrow the scope of the license that enables Pandora to play their music.
According to Reuters, a U.S District Judge ruled that the American Society of Composers, Authors & Publishers needs to license its entire works to Pandora for the 2011 to 2015 period, even if publishers seek to withdraw authority to license.
We believe that the new stock offering coupled with the recent legal win will further drive Pandora’s stock price. However, rising costs related to licensing and increasing competition are the major concerns in the near term.
Currently, Pandora has a Zacks Rank #3 (Hold).