Pandora investor hits right note with sale push

May 17, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own. 

Investor Carl Icahn’s protégé is striking the right note. Keith Meister, founder of activist hedge fund Corvex Management, is pushing Pandora Media to sell itself after his firm became the $2.2 billion online music service’s largest shareholder. A costly acquisition, an abrupt leadership change and a lack of song rights suggest the company is floundering. Rivals Spotify and Sirius XM could make sense as partners.

Pandora has two big attributes: it’s easy to operate and uses algorithms to suggest songs based on listener preferences – Grateful Dead anyone? The 16-year-old service is, though, in stiff competition with Spotify, which has more global subscribers, and deep-pocketed Apple, Amazon.com and Alphabet .

Pandora weathered a hike in music-royalty fees last December, but growth in the number of users has stalled, and its stock price has fallen 21 percent since January. For the quarter ending in March, the company had fewer than 80 million active listeners, down from more than 81 million in the prior quarter. It’s now aiming to expand internationally by cutting deals for music rights directly with record labels and artists.

Relying mainly on advertising for revenue may no longer be enough. Pandora has tried to diversify, buying ticket purveyor Ticketfly for $450 million in November. But that business contributed only 7 percent to Pandora’s first-quarter revenue of almost $300 million.

Chief Executive Brian McAndrews’ exit in March has ruffled investors even further. Replacing him with founder Tim Westergren suggested there was serious dissension in the ranks, and the new boss quickly nixed efforts to find a possible buyer for the company.

At this point, a sale might be the best outcome. Spotify, which recently raised $1 billion and faces pressure to go public, could be interested in Pandora’s substantial user base and advertising sales operation. Sirius XM, a $20 billion satellite radio service, could benefit from Pandora’s popularity on mobile devices. Even Apple, which is trying to make iTunes easier to use, could see a solution in Pandora’s simple design.

Meister argued in a letter to Pandora directors that there could be plenty of strategic buyers willing to pay a substantial premium. The board should be all ears.

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