Pandora’s Box: A Cash-For-Stock Deal, Or A Buyer Appeal?


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On a day when it released Q1 2017 results reflecting a loss of $132.3 million, streaming audio favorite Pandora revealed that its received a $150 million strategic investment from KKR.

The cash injection into the struggling pioneer of streamed alternatives to traditional radio stations means that KKR’s head of media and communications private equity in the Americas, Richard Sarnoff, will join Pandora’s board of directors.

This results in the resignations of James Feuille and Peter Gotcher from Pandora’s board.

Furthermore, the Board of Directors is forming an independent committee, to be chaired by independent director Tim Leiweke, former President/CEO of Maple Leaf Sports & Entertainment and former President/CEO of Anschutz Entertainment Group, to identify and appoint new directors who will provide additional expertise and leadership as Pandora moves forward.

In addition, at the upcoming 2017 annual meeting of stockholders, the board will recommend that its stockholders approve a resolution to declassify it and provide for the annual election of directors in the future.

What’s intriguing is whether or not Pandora will make a move before it even takes a penny from KKR.

While Pandora notes that it is “looking at all opportunities and to set a course for the future,” TechCrunch reported on Monday (5/8) that Pandora will seek a sale with another party before engaging in the KKR arrangement, which would hand KKR preferred stock in exchange of the much-needed cash.

Indeed, outgoing board member Feuille commented, “Having secured a significant financial commitment from KKR to strengthen the company’s balance sheet, we have positioned [Pandora] to evaluate any potential strategic alternatives, including a sale, in the 30 days before the financing is set to close.”

He added that the steps the Pandora board elected to take Monday afternoon offer Pandora to consider all opportunities and to set a course for the future.

“We are happy to be partnering with KKR on this investment,” said Pandora CFO Naveen Chopra. “A strong balance sheet gives us the ability to accelerate growth investments when appropriate and to compete aggressively in a rapidly changing, complex market.”

Sarnoff added that KKR was “excited to support the long-term growth of Pandora” with the investment. Calling Pandora “a true pioneer in digital music,” Sarnoff believes the streaming audio company is “uniquely positioned over the long term,” thanks to the size of its user base, “the quality of its new subscription services” and “the fact that it has created one of the few scaled streaming media businesses in the U.S.”

Sarnoff also cited the much-heralded launch of Pandora Premium as “yet another example of innovation at a company that created the modern-day music recommendation engine. We believe that the next few years should be transformational for the company.”

Terms of the investment would see KKR purchase an aggregate of $150 million in a new designated Series A convertible preferred stock of Pandora.

Pandora will pay dividends to the holders of the preferred stock quarterly at an annualized rate of 7.5% if paid in cash or 8% if paid in kind, at its option.

The Series A preferred stock is convertible into common stock, cash or a combination thereof at a conversion price of $13.50 per share. The offering may be upsized to a total of $250 million should Pandora elect to issue additional shares.

The offering is subject to customary closing conditions, including regulatory approval, and it is not expected to close earlier than June 8, Pandora says.

Centerview Partners and Morgan Stanley & Co. are serving as the financial advisors to Pandora, and Sidley Austin LLP is acting as legal counsel.

For KKR, Deloitte served as accounting and tax advisor. Paul, Weiss, Rifkind, Wharton & Garrison LLP is acting as legal counsel.

Pandora’s stock was up in after-hours trading on Monday. At 5pm Pacific, “P” was trading at $10.73, up 3.2%.