Pandora Media is inching closer to its IPO. The music-streaming superstar updated its anticipated offering on Thursday, aiming to sell 13.7 million shares -- though underwriters can bump that up to 15.7 million. The initial pricing range per share is now $7 to $9, so we're talking about as little as $96 million to as much as $142 million being raised in the deal.
If that seems reasonable, keep in mind that less than a tenth of the company's stock is being sold in the IPO. There will be a total of nearly 160.8 million shares outstanding if the overallotment is exercised, implying a value of $1.45 billion at the $9 price point. Tack on the real possibility that the deal prices higher -- and the even greater likelihood that the shares will pop higher out of the gate -- and Pandora's valuation now becomes a matter of billions.
Will Pandora's trading debut help or hurt satellite-radio comeback kid Sirius XM Radio (Nasdaq: SIRI ) ? Will it have an impact at all? Before we address the issue, it's important to take a step back to see where each company is coming from.
The fall and rise of satellite radio
Sirius XM has come a long way since its stock bottomed out at $0.05 a little more than two years ago. The cash-strapped company was facing debt milestones and content provider payments it couldn't afford, and CEO Mel Karmazin warned of a possible bankruptcy filing.
Liberty Capital (Nasdaq: LCAPA ) stepped in to save the day, but not before walking away with a 40% preferred-share stake in the company.
The now-profitable and fiscally resilient Sirius XM has the equivalent of 6.5 billion shares outstanding. In other words, Sirius XM's success isn't sneaking up on anyone anymore.
Even with the stock taking an 8% hit last week on weak car sales, Sirius XM's packing a market cap of $14 billion, and an enterprise value of $17 billion. For those scoring at home, that's more than all of the major publicly traded terrestrial radio operators combined.
This doesn't mean that Sirius XM hasn't earned its rich valuation. It may only reach 20.6 million subscribers and their passengers -- a fraction of terrestrial radio's audience -- but we're talking about 20.6 million people willing to pay for premium radio.
Unlike traditional radio stations, which rely almost entirely on advertisers to pay the bills, just 2% of Sirius XM's revenue mix comes from sponsored spots. Sirius XM's bread and butter has always been subscriptions, which average about $11 a month across all of the company's activated receivers. This dynamic makes Sirius XM a steadier bet than radio advertisers, at a time when skeptics fear that more traditional media advertising dollars will flock online.
In short, Sirius XM is expensive -- but worth it.
Taking a peek inside Pandora's box
Still, in terms of musical experiences, it's hard to top Pandora. The company has spent the last decade dissecting the intrinsic qualities of music to crank out personalized streams. Enter a single song or a quick scan of your Facebook favorites, and Pandora's off, adapting a playlist in real time just for you.
The service's popularity is contagious. There are now more than 90 million registered users, and Pandora accounts for half of the massive Internet radio listening market. Beyond passive PC streaming, the Pandora mobile app is available across all five leading smartphone platforms. On iOS and Android, Pandora consistently remains at the top of music download lists. Apps are also available for Research In Motion's (Nasdaq: RIMM ) BlackBerry, Hewlett-Packard's (NYSE: HPQ ) webOS-fueled Palm Pre, and Microsoft's (Nasdaq: MSFT ) Windows Mobile.
Pandora is a largely free service, wedging brief ads between the content to offset its costs. Revenue spiked 150% to $137.8 million last year, and its deficit narrowed substantially. This was a welcome trend when Pandora filed to go public earlier this year, but with last week's filing, we now know that the first quarter wasn't so comforting on the bottom line. Revenue did soar 136%, but Pandora's net loss more than doubled.
In a move to milk more revenue from its most active users, Pandora limits free access to 40 hours a month. Pandora One is a subscription at a nominal price of $36 a year, offering unlimited commercial-free streams and other premium goodies. Despite Pandora One's success, advertising still accounts for 86% of the company's revenue.
One other point worth addressing is that Pandora won't be bringing in a whole lot of money during the IPO. Some 8.7 million of the shares it's offering come from insiders cashing out. The net proceeds of the 5 million to 7 million freshly minted shares will result in as much as roughly $50 million in net proceeds, but more than half of that will go right out to pay off accrued dividends on convertible preferred shares that are being swapped for common stock.
Choose your weapon
The inevitable comparisons will soon begin to materialize. Pandora is a speedster, but it's not profitable. Sirius XM is in the black, but it grew its top line by a mere 9% in its latest quarter.
If Pandora's offering is priced at $9 a stub, Sirius XM will command a market cap 10 times greater. However, comparing Sirius XM's profitable $724 million in revenue during the first three months of this year to Pandora's profitless $51 million in the same quarter puts things in its proper perspective. Pandora is growing a lot faster, but will it be able to turn the corner?
An IPO doesn't have to be profitable. Groupon is losing gobs of money, but the three-year-old dealmaker will likely command a larger market cap than Sirius XM and Pandora combined.
Pandora won't appear cheap by most measuring sticks, which will ultimately be good for Sirius XM investors. Instead of pitting Sirius XM against sleepy terrestrial radio operators, investors will now have a category of two premium audio content broadcasters on the rise.
That can only help, especially since both companies have unique catalysts that may take their games to even higher levels. Sirius XM is eyeing a rate hike next year, and the next generation of satellite receivers should hit the market later this year. Pandora's just scratching the global surface, and now that smartphones are converging with automotive dashboards, Pandora will become even more popular with drivers.
Sirius XM and Pandora may be rivals in many ways, but when it comes to justifying their lofty valuations, they are joined at the hip.
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