By : Lee Spears | June, 13 2011
Pandora Media Inc., the Internet- radio company, is seeking a $1.8 billion valuation in its initial public offering today as it bets a 33-fold jump in sales since 2007 will compel investors to overlook a decade of losses.
The Oakland, California-based company aims to raise as much as $176.2 million, offering 14.7 million shares for $10 to $12 each, according to a regulatory filing. At the midpoint, Pandora would be valued at about 13 times last year’s sales, compared with a multiple of 2.8 for Sirius XM Radio Inc. (SIRI), the subscription-based satellite-radio service.
Pandora boosted the size of its offering 43 percent last week, adding 1 million shares and raising the price from a range of $7 to $9. While the company will compete with peers such as Sirius, it may face a bigger risk staying ahead of established technology companies including Apple Inc. (AAPL), Amazon.com Inc. (AMZN) and Google Inc. (GOOG) that are investing in their own online music offerings.
“They’ve taken an industry that a lot of people wondered how it could be monetized and have been very creative about it,” said Anupam Palit, an analyst at New York-based GreenCrest Capital, which researches private companies. “This has been a very widely anticipated IPO.”
Pandora, which has lost $92 million since 2000, joins a spate of recent Internet IPOs, including a planned $750 million offering from Groupon Inc. and an expanded sale last month from LinkedIn Corp.
Ad Sales
Founded in 2000 by Tim Westergren under the name Savage Beast, Pandora makes 87 percent of its sales from advertisements that target users based on age, gender, home postal code and musical taste. Ads support the free radio service, though the company also sells subscriptions to users who prefer to listen without advertising.
Sales from ads surged over the past two years as Pandora’s music application became one of the most popular on Apple’s iPhone and Google’s Android devices. Now Pandora is facing increased competition from Apple itself.
The Cupertino, California-based company has reached agreements with several major record labels to let users of a new music service store their content on its servers. By moving the files into the so-called cloud, songs will be available without users having to synchronize gadgets. Instead, tracks can be streamed anywhere with a Web connection.
‘Tremendous’ Risk
Amazon.com, based in Seattle, unveiled in March its Cloud Drive service, which allows users to store their digital music collections remotely and stream them to mobile devices or computers connected to the Internet. Google, based in Mountain View, California, announced last month its Music Beta service, which also allows cloud-based music storage and streaming.
“When you don’t know how aggressive competition is going to be, but there are a lot of very well-financed players attacking the space, the risk is tremendous,” said Richard Greenfield, an analyst at BTIG LLC in New York.
Greenfield estimates Pandora’s per-share revenue at $1.36 in the 12 months through Jan. 31 of next year. The stock would be “far more compelling” priced at $4 to $5, or about 3.7 times sales, he said.
Startups such as San Diego-based Slacker Inc. and San Francisco-based Rdio Inc., as well as CBS Corp.’s Last.fm, are also providing competition by offering music through the Internet.
Seeking Profitability
Spotify Ltd., the London-based online-music provider that’s currently available in seven European countries, has reached agreements with three major record labels and is close to a deal with a fourth to begin a U.S. service, which could start as soon as next month, people with knowledge of the matter said yesterday.
Pandora is selling 6 million of the shares in the IPO, while existing shareholders are offering 8.7 million. The company’s proceeds will be about $58 million after underwriter fees, filings show, which it will use to pay more than $30 million of accrued dividends and for general corporate purposes.
The company will need to spend money to increase returns from advertisements that are served to its non-paying users, GreenCrest’s Palit said. Pandora’s business costs increase as its sales and listeners grow because it has to pay royalty fees each time a song is played.
Annual Loss
The annual loss shrank to $1.8 million last year from $16.8 million a year earlier as registered users topped 90 million. Royalty costs increased 21-fold since 2007 to $69.4 million last year, while revenue jumped to $137.8 million in the same period.
“They do need to get to profitability relatively soon in order to justify this multiple,” said Espen Robak, president of New York-based Pluris Valuation Advisors, whose firm helps private companies value their stock and other securities. “They have significant content acquisition costs” that need to shrink as a percentage of costs, he said.
Hearst Corp., the New York-based publisher, plans to sell 4.4 million shares in the offering to pare its stake to 2.7 percent from 5.7 percent, according to the filing. The largest shareholders, Crosslink Capital, Walden Venture Capital and Greylock Partners, aren’t selling in the IPO.
Morgan Stanley (MS), JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) are leading the offering. The shares will trade on the New York Stock Exchange under the symbol P.
Bankrate IPO
Elsewhere in IPOs, Bankrate Inc., the online provider of interest-rate information, plans to raise as much as $320 million this week as it returns to the market after a 2009 private equity takeover.
The company is offering 20 million shares for $14 to $16 each, according to a regulatory filing. The North Palm Beach, Florida-based company is selling 12.5 million shares, while existing stockholders are selling 7.5 million shares.
The $15 midpoint of the IPO range is about double the average per-share price of $7.51 that existing investors paid for their stakes in the company, the prospectus shows. At the midpoint, Bankrate will have a market capitalization of about $1.5 billion after the offering.
Goldman Sachs Group Inc. and Bank of America Corp. are managing Bankrate’s offering. The shares will trade on the NYSE under the symbol RATE.
