Pandora looks as if it’s spinning a new theme song: The Consolidator. The $4.3 billion Internet radio firm is still losing money and the industry’s growth is slowing. Yet the stock has been on a tear, up more than 150 percent since the start of the year. Selling shares prudently shores up the balance sheet. It also gives the new boss - who knows about M.&A. - a chance to buy smaller rivals nipping at Pandora’s heels.
Pandora has grown by stripping market share from terrestrial radio. Listening hours increased to 8.1 billion in the first six months of this year from 6.4 billion in the first half of 2012. It has about 8 percent of the total United States radio listening market. But royalties eat a huge chunk of the money the firm makes from selling ads. Content acquisition costs are almost 60 percent of revenue. Growth should help improve gross margins - but the firm warns business maturation and competition means it will be increasingly difficult to find.
Raising more than $200 million of new cash gives the arriving chief executive, Brian McAndrews, money to possibly buy smaller rivals like Slacker Radio, Rdio, Rhapsody, SoundCloud and a host of others - many of which are backed by venture capital looking for an exit. Consolidation wouldn’t only benefit Pandora’s revenue and margins through operating leverage. Size would also give the company greater sway with advertisers and, most important, heft in its fight in Congress to revamp royalty rates to its benefit.
Despite the dilution that accompanies the stock sale, not to mention a warning that growth could slow, the stock barely moved. Investors are clearly open to the idea of cramming rivals into Pandora’s Box.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
