Pandora Pays A Premium For What It Hopes Will Be The Right Strategic Investor

Shares of Pandora Media Inc P were trading higher by nearly 4 percent early Tuesday morning in reaction to the company's mixed financial results. However, the company's earnings report was accompanied by the announcement of a $150 million investment from the private equity powerhouse KKR and a board shakeup.

Following the earnings report, JMP's Ronald Josey maintains a Market Perform rating on Pandora's stock with no assigned price target. According to the analyst, Pandora's report came in "broadly in line" versus expectations, subscriber growth was better than expected and an updated second-quarter and full-year guidance imply a ramp to subscription will take time.

The Primary Takeaway

Josey argued the most important takeaway from the streaming music provider's report is KKR's $150 million strategic investment and confirmation the company is evaluation strategic alternatives, including a potential sale of itself.

KKR will invest $150 million in Pandora's preferred stock, which matures in 2022 with a $13.50 per share conversion price along with an 8 percent quarterly coupon. By comparison, the company issued 2020 convertible notes with a $16.42 conversion price and 1.75 percent coupon in the fourth quarter of 2015. As such, Pandora is "clearly paying a premium" for what could prove to be the right strategic investor in KKR.

Finally, while Josey stated he is "encouraged" from the strategic investment but absent any acquisition, the stock's risk to reward profile remains balanced for the time being. This could change if Pandora is able to demonstrate "more clarity" in consumer adoption of the streaming music provider's new subscription products along with stabilization in advertising-based products.

Shortly before the opening bell, Pandora's stock had given up some of its early morning gains, and at last check before publication, shares were up just 0.38 percent at $10.44.

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