The Pandora Premium IPO Matters, A Page From LinkedIn's Playbook (P, SIRI, AAPL, LNKD)

Pandora Media, Inc. (NYSE: P) is not only about to come public, it is really bucking the trend of the markets.  It looks like the only threat to SIRIUS XM Radio Inc. (NASDAQ: SIRI) is also ignoring the new initiative for iCloud and iTunes from Apple Inc. (NASDAQ: AAPL) and for its new music offering.  Demand from investors is there so far and Pandora just increased its price range as far as the capital it plans to raise.

As amended, Pandora’s S-1 filing proposes a maximum offering price of $12.00 for 14.7 million shares. Initially Pandora indicated an offering of 13.7 million shares between $7.00 and $9.00 per share.  At the amended levels, the offering could raise in excess of $180 million if it opens near the proposed offering price and gets the overallotment option exercised.

Since Pandora participates in the same space as Sirius XM, it stands to benefit from Sirius’s generous valuation.  The new and ongoing Apple initiative is a threat.  What is interesting is that despite Pandora being an online media and despite Pandora players starting to become available for cars, most analysts and investors consider Pandora as just another threat to terrestrial free-radio.  Think Clear Channel.

Now Pandora may have a value at its IPO of $1.3 billion or more. Pandora could always try to launch its own exclusive content, but SIRIUS XM has a lock on most sports venue events and has a lock on many premium hosts.

Our own take is that Pandora is still a more narrow niche than SIRIUS but is competition for that old AM/FM terrestrial-based radio sector. This last year Pandora generated $137.8 million as far as revenues, but about 90% was ad-generated revenue.  Only about $18.4 million of its sales came from subscription
services. SIRIUS XM is almost entirely subscriber-based revenue, and that is a huge difference.  From
an outsider’s viewpoint, it sure seems that Pandora’s royalty payments rise more than SIRIUS XM’s for music.

Pandora may price as soon as next week.  The underwriters are a large group for a small IPO, but that may just allow for more analyst coverage.  Morgan Stanley, Citi, and J.P. Morgan are listed as the joint book-runners.  Co-managers in the offering are William Blair, Stifel Nicolaus, and Wells Fargo.

Our last take is that Pandora is trying to play almost the same game that LinkedIn Corporation (NASDAQ: LNKD) played when it came public.  By having a low float at the start, Pandora will have higher demand for the shares from those who can actually get the shares. That usually generates a higher valuation as shares pop to a higher price than if the entire company was being sold, even if the example from LinkedIn has not kept shares from falling.

JON C. OGG