Hillside Intraday Update (P)

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Hillside Intra-Day Update
 

 
New Issue Analysis: 
Pandora Media (P) Convertible Senior Notes Due 2020

 

December 03, 2015

Introduction

Pandora Media is making a run at the convertible market with a $300 million convertible senior note issue. The leader in Internet radio in the United States, Pandora launched its free, advertising supported radio service in 2005. The company boasts 250 million registered users, a better than 150% increase since the company’s IPO (2011). Most of the targeted proceeds will be used for general corporate purposes, which could include potential acquisitions and other strategic transactions.

More on the Bond …

Based on a price-talk midpoint believed to be 2.0% up 27.5% on a five-year issue with two years of provisional call protection, our initial HOCS slash line measures 82 Overall / 82 Growth / 81 Safety, a very impressive score for a new deal. The overall and growth scores reflect solid revenue growth of the past several years. With the stock at $14.27, below the midpoint of its 52-week range ($11.38-22.60), the company’s market capitalization totals $3,050 million. Company fundamentals remain solid. However, certain account user metrics have recently come under pressure. Hence, a degree of caution is warranted. Still, the stock’s recent trading history together with the modest premium make this an interesting deal.

More on the Credit …

Pandora is the leader in Internet radio in the United States, offering a personalized experience for listeners wherever and whenever they want to listen to radio on a wide range of smartphones, tablets, computes, and car audio systems, as well as a range of other Internet-connected devices. The company allows users to adapt playlists in real-time based on the individual feedback of each listener. It also offers local and national advertisers an opportunity to deliver targeted messages to listeners using a combination of audio, display, and video advertisements.

Pandora continues to enjoy significant revenue growth. In addition, investors can draw substantial comfort from both a strong balance sheet (the proposed convert would be the only debt) and liquidity. However, the company is only slightly free cash flow positive. Furthermore, it faces several competitive challenges. Active user growth has slowed dramatically the past several quarters. Growing competition, the likely culprit, will remain keen for the foreseeable future. Spotify continues to gain share. In addition, Apple Music recently entered the market. Moreover, Pandora’s competitors have spent more than greater than $100 million to publicize the variety of offerings. Close monitoring of these developments and related trends will be necessary, but this convertible looks like a good place to start.

 

Summary Financials    
(LTM Pro Forma)   ($MM)
Revenues   1,095
EBITDA   70
Cash   709
Total Debt   345
Market Capitalization   3,050

Sources: Company filings and Hillside Advisors LLC