Reports out this morning repeat prior reporting that Spotify may go public this year or the next through a “direct listing.” It’s a mechanism that doesn’t seem to crop up too often in tech, hence the unfamiliarity with the concept. CNBC’s report cites “between the fourth quarter of 2017 and first quarter of 2018” as the most likely timing windows for the firm’s flotation.
With a direct listing, Spotify would generate no new capital for itself. Instead, in the words of Seeking Alpha: “Spotify would simply list its shares on the exchange without pricing them ahead of time, and let them trade freely on the open market rather than blocks being placed by underwriters.”
But why would Spotify—a company with impressive growth, huge ARR, and a market-leading position—not want to generate funds through its IPO? Because its business might be tough to value in the next few quarters, and the terms of the deals that it signed last year when it raised $1 billion in debt are nigh-ruthless.
In fact, at the time, TechCrunch called them “devilish terms.” Here, again, are the bruises:
TPG and Dragoneer get to convert the debt to equity at a 20% discount of whatever share price Spotify sets for an eventual IPO. And if it doesn’t IPO within the next year, that discount goes up 2.5% every extra six months.
Spotify also has to pay 5% annual interest on the debt, and 1% more every six months up to a total of 10%. And finally, TPG and Dragoneer can sell their shares just 90 days after the IPO, before the 180-day lockup period ends for Spotify’s employees and other investors.
Discount price at IPO, increasing; interest on the loan, increasing; and lockup period, reduced. You can see why Spotify might want to get its IPO over and done with, putting those spiraling terms to bed for good.
Spotify was valued, to pick one example, over $4 billion in 2013. According to the Crunchbase Unicorn Leaderboard, that figure grew to $8.53 billion by March of 2016. That is quite a lot of valuation to defend at IPO, or extend through a normal, up-price debut.
So Spotify may directly list, cutting out the usual work of pricing and so forth. The only downside is whether or not the company needs the capital in the short-term.
CNBC reports that Spotify’s “growth rate in revenue” is 43 percent. Presuming that figure is either a year-over-year GAAP revenue result for a full quarter or year, or a year-over-year ARR figure, the company is within current norms regarding tech-IPO-prospect growth.
So regardless of what method and valuation it finally does go public with, Spotify will have a fighting chance.
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