June 15, 2011 1:17 am

Pandora prices IPO well above range

Pandora, the streaming music website, has seen strong demand for its initial public offering despite concerns about the viability of its business model.

The company and its venture capital backers raised $235m on Tuesday by pricing the shares at $16. That compares with its projected range of $10 to $12, a spread higher than the original $7 to $9.

The pricing values Pandora at $2.6bn, or 19 times last year’s sales of $137m. That is much higher than most traded companies, but still below LinkedIn, the business social network, which debuted last month at more than 30 times last year’s sales.

The success of LinkedIn and now Pandora is propelling high hopes for anticipated offerings by companies like Groupon and Facebook, though it has led some analysts to suggest there may be a bubble in web company valuations.

Pandora’s IPO fared well despite several concerns.

Pandora uses the Music Genome project to create listener playlists and generates revenues by selling ads. But the fees Pandora pays to license music consume nearly 50 per cent of its revenues, versus less than 5 or 10 per cent for typical satellite and traditional terrestrial radio stations.

After enjoying profitable periods last year, Pandora slipped back into the red in the first quarter of 2011, losing $6.7m. Sales were $51m, more than double the $23m generated in the same period a year ago. But it cost Pandora $29.1m to license music, up from $12.6m.

However, investors are betting on potential. Pandora has less than 1 minute of advertising per hour of listening and may be able to profitably sell its services on new platforms, such as mobile phones or a social network.

“They probably can squeeze out more revenue per listener-hour, but it would nice to see that happen first before we put it in our 401(k)s,” said Espen Robak, president of Pluris Valuation Advisors.

Pandora’s IPO also comes as competition among “cloud” music services in the US is heating up fast. Amazon and Google launched services in recent weeks as they tried to pre-empt Apple’s extension of its dominant iTunes service, which came with last week’s announcement of the iCloud.

Meanwhile, Spotify, which has grown rapidly in Europe and already has an agreement for its service to be integrated into Facebook, is finally reported to be getting near to a US launch after drawn-out negotiations with music labels.

The outbreak of such competition makes it almost impossible to predict how Pandora will fare as it tries to justify its high valuation, said Richard Greenfield, a media industry analyst at BTIG. He estimated Pandora’s shares are worth only $4 to $5.

This year so far has been the busiest to date for IPOs of technology companies in the US since 2000, with 22 deals raising $5.9bn ahead of Pandora’s offering. That is the most raised for any sector in the US this year, according to Dealogic.

Pandora raised $96m in the offering and selling shareholders raised $139m. Hearst, the media group, which had a 5.7 per cent stake, raised $69m in the sale. King Street Capital, a hedge fund, sold $24m worth of shares

Joseph Kennedy, who has been chief executive since 2004, has a 2.6 per cent stake worth some $67m. The largest venture capital investors in the company, including Crosslink Capital, Walden Venture Capital and Greylock Partners, sold no shares.

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