Last year when Spotify took on $1 billion in debt, we reported that it did so under terms that forced rate increases if it failed to IPO. Now, those terms could force Spotify to IPO quickly, which leaves the music industry in a strong negotiating position.
Spotify raised $1 billion in debt funding early last year from TPG, Dragoneer and clients of Goldman Sachs. That put Spotify's pre-IPO total potential cash intake at $2.56 billion. But the cash came with some potentially onerous terms.
Spotify pays 5% annual interest on the debt, adding 1% every six months for a total of up to 10%. Investors can convert their debt to equity at a 20% discount of Spotify's IPO share price; and if there is no IPO within a year, the discount at which they can eventually buy stock increases 2.5% every extra six months. Additionally, these investors can sell their shares just 90 days after the IPO, well before the 180 day lockup for Spotify’s other investors and employees.
Major Labels, Market Conditions To Determine Spotify's Future
Spotify has been preparing to IPO for months, hiring experienced financial staffers and otherwise getting their business in order. But there are two major factors that could easily get in the way of a successful IPO.
First, Spotify has been locked in difficult negotiations with the major labels for month. Most analysts believe that Spotify shouldn't and won't IPO unless these deals are completed. That leaves the music streamer in tough spot. No deal means no IPO; and a bad deal will stifle investor interest. This looming deadline leaves the music industry in a very strong position to negotiate better terms.
The second hurdle that Spotfy faces could be market volatility. The Dow hit a new record this week and the economy is humming along nicely. But with a Trump presidency comes many unknowns and the real risk that his actions elsewhere could create market uncertainty.
2017 is a crucial year for Spotify. While it enters as the dominant player in music streaming, it is also an unprofitable company that is travelling with heavy debt packed in a boat load of unresolved issues.