Spotify Finally Readies an IPO...That’s Not an IPO
Music-streaming service considers a direct listing, bypassing the typical public-offering script
Music-streaming service Spotify AB is readying an initial public offering that is expected by year-end. The rub is this: It may not really be an IPO.
Spotify is seriously considering a direct listing, in which the company would simply register its shares on a public exchange and let them trade freely, according to people familiar with the matter. The company wouldn’t raise any new money or use underwriters to place new blocks of stock.
That would mark a departure from the typical IPO, in which new investors buy shares from the company or its early investors, or both, the night before they start trading. The initial price is set by underwriters following extensive meetings with potential new investors.
In a direct listing, investors purchase shares in the open market after they are listed. The price is set organically based on supply and demand. Spotify, which has raised more than $1 billion in equity, was last valued privately at $8.5 billion in June 2015. The Swedish company is targeting a public valuation of more than $10 billion, the people said. The 10-year-old company may list its shares on a U.S. exchange as early as September.
If the company does list this way successfully, it could create a path for other highly valued technology companies with ready access to cash to quickly move into the public domain without using the typical IPO script.
Spotify last year issued a $1 billion convertible bond to parties including TPG and Dragoneer Investment Group. The interest rate of 5% increases 1 percentage point every six months until the company goes public, giving it a potential incentive to pursue a listing sooner rather than later, The Wall Street Journal has reported. Having a public stock would also give Spotify’s investors and employees the opportunity to cash in their shares.
By pursuing a direct listing, the company could save on hefty underwriting fees and avoid dilution that comes with issuing new shares, according to some of the people familiar with the matter. Its early investors would be subject to less stringent lockups governing the sale of insiders’ shares, those people said. What’s more, the company could avoid the first-day trading pop that characterizes many IPOs shepherded by underwriters. They are good for some investors but also indicate a company left money on the table.
There are risks to this approach, whose consideration by Spotify was earlier reported by Mergermarket. With market forces determining the share price from the outset, the company’s public debut could be more volatile and unpredictable. Also missing would be the large blocks of stock underwriters typically allocate to investors they believe will hold the shares for the long term and promote trading stability.
Spotify, which recently hired banks to advise on the process, could still choose to move forward with a more-traditional IPO, one person said.
Several IPO watchers said they could think of few examples of major companies going public in the U.S. in this way. Direct listings have mostly been used by small companies that don’t anticipate much trading in their stock, including those that have just emerged from bankruptcy. But some sizable companies have used them over the years. Freddie Mac, for example, in 1989 became a public company by listing its existing stock in a similar fashion.
Spotify’s case is the latest sign of the growing antipathy toward public ownership in Silicon Valley and corporate America more broadly. The number of public companies in the U.S. has declined dramatically as private funding sources multiply and officials weigh the cost of increased scrutiny from investors and regulators. When companies go public, they are increasingly doing so in ways that insulate them from such forces, like handing founders outsize voting control, as in Snap Inc.’s recent share sale.
In Spotify’s case, it is an approach that would spell bad news for a key business on Wall Street that is already reeling.
Last year, investment banks generated the smallest amount of revenue from share sales in more than 20 years, according to Dealogic. IPO activity and traditional stock sales by companies that are already public have been anemic.
Spotify’s advisers would get much smaller fees than IPO underwriters typically receive, the people said. In the case of the $4 billion Snap debut, underwriters shared about $100 million—one of the smallest fees on record on a percentage basis.
Spotify wouldn’t be the first company to try to disintermediate Wall Street. Google, now part of Alphabet Inc., employed a so-called Dutch auction in its 2004 IPO in an effort to put more shares in the hands of small investors and avoid a first-day pop.
But in a sign of the difficulty of bucking the traditional approach, Google’s IPO was priced at $85 a share, below the $108 to $135 the company targeted, as investors struggled to pinpoint its value. The shares soon started climbing and now change hands for about $850 apiece.
If it lists directly, Spotify would likely need to renegotiate the terms of the convertible-debt facility it raised last year, one of the people said.
Spotify had agreed that the investors could convert the debt into equity at a 20% discount to the share price if an IPO takes place one year hence, according to a previous Journal report. If it takes place later, the discount increases. Since this wouldn’t be a typical public offering, it may not trigger a conversion. So Spotify may need to negotiate with the investors a price at which they would receive equity.