Spotify raises $1 billion in debt, and an IPO may be coming

Spotify is rising as Pandora is falling, so it could soon be the biggest music streaming service

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Right now it seems like Spotify and Pandora are on opposite paths.

The day after Pandora revamped a major portion of its executive team, including its CEO, CFO and COO, Spotify has now raised $1 billion in debt financing, according to a report out from the Wall Street Journal. 

The funding came from orivate-equity firm TPG, hedge fund Dragoneer Investment Group and clients of Goldman Sachs Group Inc.

The reason that Spotify took debt instead of equity was to avoid the dreaded down round, in which companies raise funding at a lower valuation than their previous round. Many companies have been dealing with this lately, as later stage investors have begun to devalue their investments.

By doing this, Spotify gets to stay valued at the same $8.5 billion it set when it raised $526 million in June of last year. 

Of course, there are conditions to taking this type of round, and they may just force the company to go public in the next couple of years.

As per the terms of the financing, if Spotify goes public in the next year, TPG and Dragoneer will be allowed to convert the debt into equity at a 20 percent  discount to the share price of the IPO. Every six months after that, the same discount rises an addition 2.5 percent. 

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.

In addition, Spotify agreed to pay 5 percent interest on the debt, which will go up 1 percentage point every six months it stays private, or until it reaches 10 percent. 

Even with those conditions, Spotify is in an enviable position right now, and is poised to take the top music streaming spot away from Pandora.

That company, in addition to revamping its executive team, has also been losing subscribers. 

In 2015, Pandora's active listeners were 81.1 million at the end of the fourth quarter of the year, compared to 81.5 million for the same period of the prior year, a loss of 400,000 users. Spotify, meanwhile, declared back in June that it had 75 million active listeners, up from 60 million users in January, which means it very likely has already passed Pandora in that department.

If there's one commonality between the two companies, it is that both are seeing mounting losses, even as streaming is taking a bigger piece of the music revenue pie than ever before.

In 2014, Spotify saw $1.3 billion in revenue, a 45% year-to-year increase, but the company also reported net losses of $197 million, up from a loss of about $68 million in 2013.

First, for the full year 2015, Pandora  had $1.2 billion in revenue, up from $920.8 million in 2014. However it still managed a net loss of $170 million for the year, up from a net loss of $30 million the year prior.

Spotify may be poised to become the kind of music streaming, but that doesn't mean that it can pull off a miracle by becoming a profitable business. 

VatorNews reached out to Spotify for confirmation of this new debt funding. We will update this story if we learn more.

(Image source: fastcompany.com)