Pandora’s New Path, Following Its Kill Fee

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With the announcement that Sirius XM will be making a $480 million “strategic cash investment” in streaming media company Pandora, the beleaguered company led by founder and CEO Tim Westergren immediately benefited from the deal, which is structured for extended stock purchases by Sirius XM.

However, while millions of dollars are arriving, several million dollars are evaporating, and heading into the hands of KKR.

As per the terms of a $150 strategic investment offer made on May 8 by KKR (formally known as Kohlberg Kravis Roberts), any termination of an injection of funds in Pandora from a KKR affiliate would involve a termination fee.

The amount of the check Pandora is sending to KKR: $22.5 million.

If one looks closely at Sirius XM’s agreement with Pandora, it is abundantly clear that Sirius XM is paying the kill fee, and matching KKR’s investment offer.

While Sirius XM says it is investing $480 million in Pandora, it is doing so through aggregate acquisitions of newly issued Series A convertible preferred stock.

This gives Sirius XM more voting rights than the common shareholder. But, SiriusXM will be subject to certain “standstill” restrictions, including, among other things, that it will be restricted from acquiring additional securities of Pandora for 18 months.

After that period, and for so long as a Sirius XM director is serving on Pandora’s Board of Directors, Sirius XM has agreed not to acquire more than 31.5% of Pandora’s equity securities without board approval.

Thus, early 2019 could see an outright purchase of Pandora by Sirius XM, should it have the desire to make such an offer.

The first move made by Sirius XM involves the purchase of $172.5 million of Series A preferred stock. This was done upon execution of its agreement with Pandora.

The remaining $307.5 million of Series A preferred stock will be acquired at a second closing. This is expected by Q4 2017, Pandora and Sirius XM note.

If closing has not transpired by Feb. 1, 2018, the agreement may be terminated by either party.

Once complete, Sirius XM will hold a 19% stake of all Pandora outstanding common stock, which translates to a 16% stake in the company.

‘PREMIUM’ COST FOR SIRIUS XM

According to one financial analyst who spoke with RBR+TVBR in anonymity, investors should be focused on Sirius XM stock, and if they wish to buy shares in either Sirius or Pandora to eschew the latter choice.

In midday trading on Wall Street, there was little excitement among Sirius investors.

As soon as word hit traders that a strategic investment of nearly one-half billion dollars was being made, Sirius XM shares dove into the red on lighter-than-average volume. At 1:19pm Eastern, SIRI shares were off 2.5%, to $5.26.

The financial analyst believes this may be due to discussion in recent days that an outright purchase, rather than an investment in Pandora, was the more beneficial move.

However, historical patterns suggest that the acquisitor or investor is always the company one would wish to invest in.

Meanwhile, Pandora shares were up 1.6% in noontime trading, to $8.54, as of 12:40pm Eastern. By 1:19pm Eastern, the gain had shrunk to 0.5%, with Pandora at $8.46.

Perhaps some investors want to get in while it is still a value. The Series A preferred stock can be exchanged for Pandora common stock at $10.50 per share.

That represents a 14.2% premium to Pandora’s volume-weighted average price for the 20-day period preceding Thursday, June 9, when shares in P sank to their lowest levels since October 2012.

Pandora is required to redeem the Series A preferred stock on the fifth anniversary of the closing for an amount equal to its liquidation preference, plus all accrued and unpaid dividends.

Pandora can also redeem the Series A preferred stock at any time after the third anniversary of the closing if the daily volume weighted average price of Pandora’s common stock is greater than or equal to 175% of the then applicable conversion price for a period of at least 20 days during a 30-day trading window prior to the notice of redemption.

INVEST AND BUILD: PANDORA’S ACTION PLAN

The capital provided through the Sirius XM investment, the company said, will allow Pandora to make “targeted investments” while seizing on opportunities to build on its still-formidable position in the streaming radio business—despite growing competition from Spotify, iHeartRadio and niche players including Tidal, Amazon and Apple Music.

Jim Meyer, Sirius XM’s CEO, likes the Pandora deal because of its ability to benefit from the ad-supported digital radio business—”a space where Sirius XM does not play today.”

He called Pandora’s large user base and its platform “tremendous assets”, and believes “there are exciting opportunities for Pandora to accelerate its growth and increase value for Pandora and SiriusXM stockholders.”

These thoughts have likely been shared more than once over the last year, and perhaps since Pandora’s IPO.

In February 2011, then-Sirius XM CEO Mel Karmazin was asked during his company’s Q4 2010 conference call with analysts whether Sirius XM might offer a similar service to compete with Pandora. Karmazin refused to say no, but he was less than excited about the new competitor.

“Without speaking specifically to Pandora, there’s an awful lot of IP audio content that’s out there, and virtually all of them have a music recommendation engine or algorithms that enable you to sort of target a little bit more your channels,” Karmazin said. “Most of those companies today, when you pick a channel that you want, are limited by the number of plays that you can have of a single artist because of the digital royalties act. So, we think that our channels, curated channels, are something that’s very desirable. When you take a look at our time spent listening, which we do, and we compare it to the time spent listening of a lot of the IP channels, we see a greater satisfaction from our content.”

Times change, and Pandora since early 2011 has seen a dramatic rise and subsequent dip in use, while streaming audio has boomed as a new choice for consumers and advertisers.

By July 2016, reports surfaced that Pandora—now seeing stagnant growth—had hired Crestview Partners about exploring strategic options including a sale of the company. Liberty Media Corp., the entity above publicly traded Sirius XM that sees Liberty CEO Greg Maffei serve as Sirius XM Board Chairman, emerged as the top suitor.

This led to some 11 months of on-again, off-again discussions and a December 2016 report from CNBC commentator David Faber that there was a new willingness from Pandora to engage in talks with longtime suitor Sirius XM.

“Liberty Media has long recognized the strength of the Pandora brand and the opportunities in the ad-supported digital radio market,” Maffei said. “We are very supportive of Sirius XM’s strategic investment.”

SIRIUS TRIO TO JOIN PANDORA BOARD

When the transaction closes in Q4, three individuals designated by Sirius XM will be named to the Pandora Board of Directors.

One of those individuals will serve as Chairman of the Board, affirming Sirius XM’s influence and the importance of its investment.

Additionally, SiriusXM designated directors will serve as select board committee representatives.

With these appointments, the Pandora Board will grow to nine directors.

“Pandora’s Board and management team are committed to driving stockholder value and have carefully evaluated alternative strategies as part of the process disclosed on May 8,” said independent director Tim Leiweke, former President/CEO of Maple Leaf Sports & Entertainment and former President/CEO of Anschutz Entertainment Group.

With the KKR offer on the table, Leiweke was called on to identify and appoint new directors who will provide additional expertise and leadership as Pandora moves forward.

Leiweke said, “We are pleased that the conclusion of that process resulted in a major investment by SiriusXM. With this investment, we have the backing of one of the media industry’s most successful investors and significant capital to accelerate growth. Pandora is now poised to advance to the next stage of the company’s life cycle. Lastly, this transaction ensures that Pandora stockholders get the benefit of additional capital from an important strategic investor who can help enhance stockholder value.”

WHAT’S NEXT FOR WESTERGREN?

The lone remaining question for Pandora is what becomes of its founder and CEO, Tim Westergren.

In a brief comment, he said, “The investment from SiriusXM infuses resources to help Pandora continue to grow and innovate. With the strategic review behind us, and a strong balance sheet, we look forward to focusing on business execution and the optimization of our strategy.”

Thus far, there’s no chatter regarding Westergren and any potential leadership changes at Pandora.

Allen & Company LLC and BofA Merrill Lynch are serving as financial advisors to SiriusXM.

Jones Day and Simpson Thacher & Bartlett LLP are serving as its legal counsel.

Centerview Partners LLC and Morgan Stanley & Co. LLC are serving as financial advisors to Pandora, and Sidley Austin LLP and Wachtell, Lipton, Rosen & Katz are acting as legal counsel.

Additional reporting by Carl Marcucci