What: Despite receiving a notable analyst upgrade on Thursday, shares of Pandora Media (NYSE:P) fell as much as 11.6% after the streaming-music specialist announced a potentially dilutive $300 million convertible note offering.
So what: Specifically, Pandora says it intends to offer a $300-million aggregate principal amount of convertible senior notes due in 2020. Pandora also granted Morgan Stanley, the initial purchaser and sole bookrunner for the offering, a 30-day option to purchase up to an additional $45 million of the notes. The notes will be unsecured, with interest payable on a semi-annual basis in arrears, and will be convertible into cash, shares of common stock, or a combination of the two.
Pandora also expects to enter into at least one privately negotiated "capped call" transaction, one aim of which will be to reduce any dilutive effects to existing shareholders should the notes be converted to stock. Even so, that $300 million certainly isn't chump change for Pandora, considering that its total market capitalization currently sits just below $3 billion.
All told, this was more than enough to offset any optimism surrounding an upgrade from Raymond James analyst Justin Patterson this morning. Patterson raised his view on Pandora shares to Outperform from Market Perform, assigning a $17-per-share target price -- a roughly 33% premium to Pandora's current share price. Specifically, Patterson believes an impending U.S. Copyright Board decision "will remove cost structure uncertainty," and remains confident in Pandora's latest initiatives in its march toward sustained profitability.
Now what: Pandora expects to use some of the proceeds of the offering to pay the cost of the capped call transactions, while the remainder is vaguely pegged for "general corporate purposes."
But it's also worth noting that, after ending last quarter with just under $443 million in cash and investments on its balance sheet, Pandora has been busy spending its dough on a number of strategic acquisitions and initiatives.
For one, Pandora only just completed its acquisition of live events technology specialist Ticketfly on November 2, 2015 -- a $450 million transaction Pandora previously told investors would be funded with roughly equal parts cash and stock. Then two weeks later, Pandora announced an agreement to spend $75 million in cash to acquire key assets out of bankruptcy from on-demand music company Rdio.
That's not including Pandora's $90 million royalty settlement (revealed along with last quarter's results) to cover most of its pre-1972 spins retroactively, and through the end of next year. The first $60-million payment under that settlement was due in October, with the remainder to be to paid in four installments of $7.5 million throughout 2016.
With this relative shopping spree in mind, Pandora's $300 million convertible note offering is relatively unsurprising. Long-term investors with faith in the purpose of Pandora's spending don't have any reason to fret.