FBR Sees Pandora (P) Moving to Raise Additional Capital Following Rdio Deal

FBR & Co. reaffirms its Underperform rating and $10 price target on Pandora Media (NYSE: P) following news that Pandora would move to acquire certain Rdio assets.

Barton Crockett commented, The deal will position Pandora to be a one-stop provider of ad-based and on-demand music, assuming it can strike suitable deals with labels after the CRB decision by mid December. To us, this deal, in combination with the recent Ticketfly acquisition, punctuates a reality—this model is in a period of serious and fundamental reformulation. The earnings potential at the end of this period is subject to an incredibly wide range of guesses, as is the capital structure. With this deal, it seems even more likely that a logical reasonable next step for Pandora could be to pursue an additional capital raise.

On what the deal meansure for Pandora: Pandora plans to offer "an expanded listener experience" by late 2016, incorporating Rdio capabilities. We assume this means an ambition to offer on-demand access to music, pending an ability to strike licensing deals with labels, as a complement to free, ad-based streaming. Rdio's current deals apparently do not pass to Pandora as part of this deal. Pandora will be a one-stop shop—ad-based free music, subscription on-demand, and concerts via Ticketfly. It will be able to promote the subscription to its 78 million users. But the economics of all of this are very much a work in progress, with no label deals yet, no CRB determination of license fees for adbased music in the U.S., and ink on the Ticketfly acquisition barely dry.

Given that Pandora expectd to end FY15 with $180 million in cash, the Rdio deal should lop that down to around $105, Crockett noted. The analyst also said, Pandora clearly wants a comprehensive global licensing deal with labels after the CRB decision. The labels have demanded upfront cash from Spotify and Apple for such deals. Hence, Pandora might move to raise additional capital soon.

For an analyst ratings summary and ratings history on Pandora click here. For more ratings news on Pandora click here.

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