P | Panhandling? (Note Offering)

Takeaway: The pending debt raise is not likely to come with favorable terms, and could cause more harm than benefit down the road.

KEY POINTS

  1. RAISING CAPITAL: P is looking to raise $300M in debt, with an option for another $45M available to the primary bookrunner.  All we know is that the debt will be convertible (cash + stock); terms and covenants haven’t been settled yet.  Note that P has recently committed ~$356M in capital primarily toward ancillary ventures away from its core business; leaving $87M in net effective cash (vs. 3Q15 balance) prior to this offering. 
  2. TOO LATE? P probably should have explored this option a little earlier than 2 weeks prior to the Web IV decision.  That said, it’s not likely that the offering will be completed before then, which means P is not likely to receive favorable terms.  P already struggles to generate positive cash flow under the Pureplay rates, which expire at year end, and will likely be considerably lower than what it will have to pay in 2016.    
  3. WHAT DOES THIS MEAN? We’re not sure if this is just a buffer to get by while P tries to strike direct deals with the labels, or if it is planning to keep its foot on the gas on with the ad-supported model.  An Incremental $300M is not a lot relative to P’s content costs, which should eclipse +$500M in 2015.  For context, P could blow through nearly all of that $300M in 2016 on the rate increase alone in a worst case Web IV scenario (rates up +50%), while paying interest to do so.  That said, this loan could introduce an extra level of risk to the story depending on how P plans to run its model next year.  

The Web IV proceeding should be concluded by Dec 15th and announced the following day.  See below for supporting analysis on the implications of Web IV on P's business model.

Hesham Shaaban, CFA


@HedgeyeInternet 

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