Spotify direct listing music to some investors’ ears, sources say

Provided exclusively by Mergermarket

Tiger Global quietly building position in Swedish music service

Private valuation rises after new licensing agreements with labels


Spotify’s flirtation with a direct listing on the New York Stock Exchange is finding support among existing shareholders and buy-in from a new set of institutional investors, said two sources briefed on the matter.

Trading of the Sweden-based subscription music service’s shares has picked up in the private secondary markets in recent months, they said. One advantage a direct listing has over an IPO is that investors will not be tied to a lock-up period that limits when they can unload their shares, the sources said.

Tiger Global is among the investors quietly building a significant position in Spotify, the two sources said.

The New York City-based investment firm has been buying shares of Spotify in the private markets for the last 18 months, a person familiar with Tiger Global’s strategy said. Recent reports of Spotify’s potential direct listing have not influenced Tiger Global’s trading activity, the person said. Tiger Global is investing in Spotify because it thinks “it is a good business,” according to the person, and it is taking “a long position,” adding shares to one of its 10 venture capital funds and not its hedge fund.

Tiger Global declined to comment.

Rather than raise new money in an IPO, Spotify is “strongly favoring” a direct listing, a person familiar with the company’s strategy said, echoing a 22 March report by this news service. If it does go forward with a direct listing, it is likely to occur on the NYSE in 4Q17 or 1Q18, the person said. A direct listing is sometimes seen in the financial services and REIT sectors but it is rare in the wider US market.

Escalating costs connected to the USD 1bn convertible debt that Spotify issued to TPG and Dragoneer Investment Group last year are not weighing on the timing of a direct listing, the person added. Only an IPO will convert the debt into equity, the person explained, and Spotify is trying to renegotiate terms of the convertible note with TPG and Dragoneer with the expectation “everyone will walk away happy.”

Meanwhile, Spotify’s valuation is rising. The company’s shares were valued as high as USD 13.3bn in the private markets earlier this spring, the person said. The price of its shares regularly “moves up and down,” the person noted. More recently, Spotify’s shares have been valued at roughly USD 10bn in secondary trades, according to the first source. Whatever the numbers, they are a notable premium to the USD 8.5bn valuation Spotify fetched in June 2015 when it raised USD 526m in a Series G round.

Since it was founded in 2006, Spotify has raised more than USD 1.5bn in total equity from backers such as Goldman Sachs, GSV Capital, Halcyon Asset Management, Kleiner Perkins Caufield & Byers, Northzone, Senvest Capital, Technology Crossover Ventures, and Wellington Partners.

New licensing agreements Spotify struck with Universal Music Group and Merlin Network in April are boosting the company’s valuation and removing some uncertainty for investors, the first source said. Spotify is negotiating a new licensing agreement with Warner Music as well, according to a New York Post report on 17 May, which said Sony Music has so far been unwilling to negotiate with the music service.

Brokering new royalty agreements will go a long way to providing visibility into Spotify’s path to profitability, the sources said. Spotify is generating USD 3.1bn in annual revenues and operating losses of more than USD 335m, according to an 18 May report on the technology news site The Information.

Although losses are widening overall, Spotify is profitable in some markets and its revenues grew by approximately 50% annually between the end of 2016 and the end of 2015, the two sources said.

Moreover, Spotify is generating positive free cash flow and its balance sheet is healthy, the sources said.

The fact Spotify says it does not need to raise new capital in a public offering is further evidence of its strong capital position, the sources said. The company counts more than 50m paid subscribers. Its total monthly active users reportedly reached 126m at the end of last year, up from 100m users a year earlier.

Morgan Stanley, Goldman Sachs and Allen & Company are advising Spotify on its potential listing.

Spotify and its advisors declined to comment for this story.

by Troy Hooper in San Francisco

As seen in the mergermarket newsletter on 22/05/2017


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