It was a rough week for Pandora Media (P +0.00%) investors. The stock shed 11% of its value, falling after announcing and pricing $300 million in convertible senior notes that will be due come 2020.
It's easy to call this an overreaction. The convertible nature of the debt is dilutive, but that's the price that has to be paid when you're raising $300 million at a mere 1.75% interest rate. The stock surrendered $431 million in market cap on Thursday and Friday combined following the news. How can the stock lose more than the value of the actual money that it made on the offering? It's as if investors this week will be getting Pandora at a discount before we even consider the fresh $300 million in debt financing that it won't have to worry about for another five years.
Pandora is planning to tap the options market, engaging in capped-call transactions to limit its exposure and liability during the eventual conversion process. It's a fiscal move that makes the stock's hit during the past two trading days seem that much more inexplicable.
It hasn't been easy to be a Pandora shareholder. The stock is trading near October's two-year lows, and things don't appear to be getting any easier. The summertime arrival of Apple's (AAPL +2.65%) new premium streaming platform and the continuing success of Spotify are weighing on its performance.
Pandora is still a difference maker. It cranked out 5.14 billion hours of audio content to its 78.1 million active listeners during its latest quarter. That's a marginal year-over-year uptick on both fronts, and it's actually a sequential decline from the 5.3 billion hours it served to 79.4 million active listeners in this year's second quarter. It's also less than Pandora's performance during the first quarter. Apple Music isn't lighting up the world, but it seems to be eating away at Pandora's audience.
This is where the $300 million it just raised could come in handy. Pandora knows it needs more to please Wall Street. It has gone on to acquire the assets of Rdio, and reports surfaced last month on plans to expand internationally in select markets.
If Pandora wants to take on Spotify and Apple Music in the realm of premium on-demand streaming -- and that makes sense given Spotify's success and the fact that Apple Music already had more paying subscribers than Pandora that's mostly consumed by freeloaders -- it's going to need more than just Rdio on its hit list. The music's changing, and Pandora is right to arm itself with the means to try to buy into the new key.
