Spotify is reportedly looking at an unconventional direct listing on a stock market that isn’t quite the same as a full-blown IPO. The move could see Spotify register its shares on a stock exchange and become a publicly listed company without raising new cash, according to the Wall Street Journal.
Shares would be traded on the day of listing, and prices would be based on supply and demand in the general stock market - rather than new investors buying up shares before trading.
Why do it?
A direct listing would prevent Spotify from paying the underwriting fees required to launch an IPO, and would avoid diluting the value of existing stakes in the company. It’s a rare tactic, and it’s usually used by smaller companies that do not expect high levels of trading in their stock.
According to CMC Markets analyst Michael Hewson, direct listing a company is “basically just sticking it on eBay”. In an IPO, new investors can buy shares from existing investors before trading starts. With direct listing, investors buy shares on the open market on the day they are listed for the going rate.
According to Hewson, “no-one does it”. Firms usually use IPOs as a chance to make a lot of money. So it looks like the main reason that Spotify might avoid an IPO is that it can take a significant amount of time to set up.
An IPO needs a set of investment banks to underwrite an issue of new stock. Underwriting typically means that the banks buy new stocks and then sells them after the company goes public. The bank also looks at the company as part of the process for setting a reasonable initial offer price for the shares. The underwriters go to institutional investors to assess how large the IPO might be. Hedge fund managers say how many shares they want and the price they would be willing to pay, and the level of this demand is one of the factors used to set the initial offer price. That entire process takes a long time - and time is money.
Last March, Spotify raised $1 billion from investors at a 5% annual interest rate and a discount of 20% on shares once they list. Under the terms of the agreement, the interest rate increases by 1% and the discount by 2.5% each six months until the shares are listed. So as time continues, Spotify has to pay more money to its creditors and give them a higher discount on shares. This all means that they need to go public fast. Direct listing is fast, doesn’t come with a bundle of regulatory hurdles and keeps expectations about share prices reasonable. It means you don’t get the kind of hype around the price of the stock that you get around similar consumer-facing companies like Snap.
When Spotify issued it’s $1 billion convertible bond last year, the company was publicly valued at $8.5 billion. The company was founded by Daniel Ek and Martin Lorentzon in 2008. It employs over 1,600 people and has over 50 million paying subscribers. A few days ago it also signed a long-term licensing deal with Universal Music Group and major investors in the company include Goldman Sachs and TPG.