Nobody Is Talking About Pandora's $250 Million Mistake

Pandora management lost $250 million on this 2015 acquisition.

Adam Levy
Adam Levy
Jun 16, 2017 at 5:26PM
Consumer Goods

The rumors of a Pandora (NYSE:P) acquisition have finally quieted down after Sirius XM (NASDAQ:SIRI) agreed to invest $480 million for a 19% stake in the company and three board seats (including the future chairman). What many are sweeping under the rug, however, is that Pandora had to sell its ticketing platform, Ticketfly, at a steep discount in order to get the deal done.

Pandora bought Ticketfly for $450 million in October of 2015. Just 19 months later it sold the business to Eventbrite for $200 million. That's $250 million of shareholder money that just vanished in a year and a half. Considering the Sirius XM deal values Pandora at $2.5 billion and its current market cap is just $2 billion, that's a pretty hefty hit for shareholders.

Andrew Dreskin, Ticketfly co-founder & CEO presenting at FlyCon 2017

Image source: Ticketfly.

Why Pandora had to sell Ticketfly

Pandora backed itself into a corner last month when it agreed to a $150 million from KKR, a private equity firm. The deal included a clause that Pandora could continue shopping itself for 30 days. That clause essentially started a countdown to get a deal done with SiriusXM, the only company that had expressed real interest in acquiring Pandora.

There was one caveat for Sirius, however. Pandora's Ticketfly platform presented a conflict of interest with Sirius XM's sister company, Live Nation (NYSE:LYV). Liberty Media holds major stakes in both companies. Live Nation owns the Ticketmaster platform, which competes directly against Ticketfly.

That meant Pandora needed to find a separate deal for Ticketfly before it could get a deal done with Sirius. With Pandora pressed for time, anyone it negotiated with suddenly had the upper hand. And Eventbrite played that hand perfectly, walking away with Ticketfly for just $200 million.

What makes the deal even worse for Pandora is that it shouldn't have bought Ticketfly in the first place.

Why buy the cow...?

The idea behind Pandora's Ticketfly acquisition was that Pandora could use its listener data and engagement to sell more concert tickets than Ticketfly could alone. That might be true: Ticketfly sales did increase from $490 million in 2015 to $615 million in 2016. However, that growth is in line with Ticketmaster's similarly sized resale ticketing platform.

Importantly, Pandora didn't have to buy Ticketfly in order to leverage its listener data. It could have simply made deals with all the major ticketing platforms and taken a commission on each sale. While Pandora wouldn't generate as much per sale with affiliate agreements, it would produce much higher profit margins and open sales to a wider variety of artists instead of being locked in with whatever Ticketfly had access to.

Spotify successfully negotiated such deals with several ticketing platforms, including Ticketmaster. Ticketfly, as part of Pandora, wouldn't make a deal with Spotify, losing out on access to the streaming service's 100 million-plus listeners.

Bad dealmakers at the helm

The Ticketfly fiasco is just one example of the bad dealmakers at the helm of Pandora. For a stock that derives a significant portion of its value from its takeover potential, that's bad news.

Pandora reportedly had an opportunity to take $15 per share from Liberty Media last year. Liberty Media CEO and SiriusXM chairman Greg Maffei said he'd do a deal for $10 per share in March. The investment offer from SiriusXM was preceded by a take-under bid of $8 per share.

Do you see a pattern?

Sure, it's encouraging that management is optimistic that its product and company are worth more than the market says. But it's proven time and time again to be on the wrong side of the deals it makes (or passes on).