Spotify IPO Watch 5/27/16



Ed Bailey, you look like you’re just ready to burst. Well call me a fool but I guess I’ll just have to call. Cover your ears, darling.

From Tombstone, by Kevin Jarre

My analysis for a potential Spotify IPO starts with what kind of market conditions would need to be present in order for Spotify to be able to attract a full commitment underwriting  in the US.  This is particularly true since that underwriting and IPO will likely have to be of the magnitude and pricing necessary to meet Spotify’s obligations to its debt holders of $1 billion plus in convertible debt.  That debt is issued at what are essentially credit card rates when you take into account the cost of cash.

In practical terms, that underwriting is starting to look like a Facebook-level IPO in order to hit those numbers.  Or a significant restructuring in Spotify’s debt so only a piece of those shares would participate in the IPO (but the bond holders thought of this because they supposedly have a much shorter lockup than everyone else likely does).

My bet is that these conditions will require a dot bomb-like environment with sufficient bubbly frothiness that the “greater fool” mentality will take hold.  So with those assumptions in mind, how are things looking?

Trends:  New lending crisis possible due to subprime lending and oil bankruptcies due to low price of oil.  Apple looking to expand its video offerings to support Apple TV makes you wonder why Spotify is bothering with video (except that it may be influenced by former Googlers now working at Spotify).  This is all happening as the myth of the unproven connection between free users and industry grown evaporates.

A few bubble popping factors in the U.S. economy this week:

  1.  Lehman on Wheels: The Big Short Short

Surge in Subprime Auto Lending Draws Attention

Following the financial crisis, lenders became much more conservative in issuing mortgages and Congress and the White House passed legislation—the Dodd-Frank financial-regulatory overhaul—that tightened mortgage standards further.

The total sum of outstanding mortgages declined from 2008 until 2013 before beginning a slow recovery. The outstanding balance of U.S. mortgages remains more than $1 trillion below where it was in 2008.

Auto lending, however, began to recover in 2010 and by 2013 had already reached a new peak. In the second quarter of this year, the total sum of U.S. auto loans topped $1 trillion for the first time.

Subprime Auto Lender Credit Acceptance Subpoenaed by Maryland

Subprime auto lenders have issued record volumes of new loans to riskier borrowers in recent years. Some of the loans have started to show signs of stress, attracting additional regulatory scrutiny.

    2.  Trouble in the Patch

Oil bankruptcies mount despite crude rebound

There have already been at least 29 U.S. oil and gas bankruptcies this year alone, according to Haynes and Boone. That brings the toll since the start of last year to at least 64.

The default rate among exploration and production junk bonds has soared to a record 27% over the past 12 months, according to a recent Fitch Ratings report. Fitch thinks the default rate could hit 35% by the end of 2016.

          3.  Separating Content from Conduit:  I see your Comedy Central and I raise you Apple TV

Apple Exec Raised Prospect of a Bid for Time Warner (Report)

Apple expressed interest in buying Time Warner, the owner of HBO, CNN and Warner Brothers, in a meeting held late last year, according to a report in the Financial Times Thursday.

The paper claims Eddy Cue, who oversees Apple’s iTunes store, Apple Music and iCloud, raised the subject of a potential bid in a meeting with Olaf Olafsson, Time Warner’s head of corporate strategy, in New York. The Financial Times cites three people who were briefed on the discussion.

Warner, Netflix Climb on Report of Apple Interest in Media

Time Warner Inc. rose in early trading Thursday after a newspaper reported that a top Apple Inc. executive raised the prospect of buying the owner of HBO, CNN and Warner Brothers last year. Netflix Inc. also gained as the discussions underline Apple’s interest in media and potentially offering its own content….


While it’s not clear whether interest will be revived, the paper cited bankers as saying Apple has been considering a range of potential media targets. Some bankers said Apple was more likely to go after a streaming company like Netflix, as it would make it easier for Apple to offer a wide range of content makers.

But…don’t forget these two geniuses:


    4.  And Then There’s This

Spotify free users compared to global record industry revenue

Spotify Free compared to Global Revenue