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Takeaway: The rain...in Spain…stays mainly…in the plain

An Open Letter to Pandora Management... - p image

Dear Pandora Management,

You do not know how to talk to the street, so please stop leaking information to the press until you have learned how and when to do so.  You are getting in your own way, and blowing up your holders in the process.

The M&A headfakes need to stop.  We admit there was a time when we appreciated the take-out speculation, which we saw as a backstop against our long.  However, the problem is that M&A had become the entire story because the related headlines were being circulated way too frequently.  That allowed Maffei, who probably wouldn't even get a seat at the table if/when the activists force you to solicit bids, to drive your stock into gutter with one baseless comment (link).   

The leak about seeking new terms/equity from the Labels was unacceptable.  We're not opposed to P offering equity to the Labels in exchange for better deal terms, we actually think it could be worth the dilution.  But that's a private conversation.  Reason being is that the only thing the street took away from that story is that P needs capital.  Note that part of the reason why your terms with the Labels are less than ideal is because you lost leverage in negotiations by sharing too much information publicly.  Telling the street that you expected to have direct deals done by 2H16 was effectively the same thing as telling the Labels you had a deadline to get them done.

The leak about seeking private equity capital ahead of a potential sale was beyond unacceptable.  All you did was reinforce the narrative that P needs capital, especially since the story broke about a week after the one above.  Making matters worse, the story suggested that P's existing shareholders, who are already underwater as it is, would get diluted upon a sale.

As an aside, you do not need to raise capital, and you do not need to beg for new deal terms.  You just need to throw your weight around.  If you put the the mobile listener cap back on in some capacity, you will shave a lot of cost out of the model while potentiallly driving sub growth at the same time. P could become profitable overnight, and the Labels may come to you to renegotiate when their ad-supported royalties start declining.  At a minimum, it will make the Labels rethink how much leeway they're willing to give Spotify on its free tier as part of any new direct licenses.  We respectfully suggest that you put some form of the mobile listener cap back on as soon as possible before Spotify has the chance to finalize its new deals with the other two major Labels.  

P may be on the eve of a breakout quarter (link), so please do not leak anything before the print.  Granted, there will be some monkey(s) that will chase the tape with a short call into the print, but you do not need to respond, regardless of how your stock trades.  If you're tempted to do so, please try to keep the 2Q15 print in mind.  There was nothing particularly special about your results/guide back then.  The reason why your stock rebounded as aggressively as it did is for no other reason than the street was expecting the worst and betting against you.  Same thing can be said heading into the upcoming print, but this time you may actually have something to show for it. 

Anything you leak from here will just make matters worse.  You have no allies on the street right now.  Your holders are massively underwater and want to you to sell.  Anyone who chased the take-out speculation got burned on the way down.  Roughly 30% of your float is short.  That said, any story that is leaked to the press will be deliberately distorted by the shorts into some doomsday scenario that will just drive your stock down further.  For now, all press is bad press, so please just stop.  From now until the print, the only message that you need to learn how to convey is that you are in control of your own story (i.e. you do not have a capital problem and you have multiple levers to pull to get to profitability).  Please practice delivering that message over and over again until you can deliver it confidently.  The rain...in Spain…stays mainly…in the plain.

Regrettably Long,

Hesham Shaaban, CFA
Managing Director