Private Trades in Spotify Shares to Play Key Role in Upcoming Debut

02/19/18 07:14 AM EST
By Maureen Farrell 

Spotify AB is counting on its surging private-market value to bolster the music-streaming service's appeal to investors in an unorthodox public debut that could be the biggest since Snap Inc.'s $20 billion IPO last year.

The listing, expected as soon as the end of March, isn't an initial public offering, in which underwriters set a price and place shares with chosen investors before trading. Instead, the Swedish company will simply float the shares on the New York Stock Exchange and let the market find a price, in what is known as a direct listing.

The unusual approach means Spotify must find novel ways to guide the market to a price, and private trading is expected to be a key part of that effort, people familiar with the matter said.

The so-called secondary markets in private technology stocks are typically an afterthought in an IPO, in part because trading tends to be thin and not always a reliable indicator of value. But Spotify and its advisers at Goldman Sachs Group Inc., Morgan Stanley and Allen & Co. are closely watching trades among private investors and have taken steps to spur volume, the people said. The company recently informed existing investors that it waived its right to buy shares before they are offered to others.

In recent months, Spotify's shares have traded at valuations between $17 billion and $18 billion, according to people familiar with the transactions. At those levels, Spotify's debut would be the largest for a tech company since Snap went public.

There is another signpost for Spotify's value: Late last year the company swapped stakes with Chinese internet giant Tencent Holdings at a valuation of nearly $20 billion.

And one investment bank that is representing a potential new investor recently approached some current shareholders and tested their appetite for selling stock at a $20 billion valuation but found no takers, a person familiar with the communications said.

But there is little precedent for the kind of direct listing Spotify is attempting and it is anyone's guess how the shares will trade.

There is no formal system for trading Spotify shares and transactions are facilitated on a case-by-case basis by a network of investment banks, fund managers and others.

Trading in Spotify shares has been relatively robust, however. The company puts fewer restrictions on stock sales by employees or early investors than many other private tech startups, some of whom heavily restrict trading. While Spotify previously had the right of first refusal on shares for sale, people familiar with the matter say the company rarely exercised it and typically let sellers process transactions quickly -- in contrast to some private companies notorious for taking days or months to approve or deny trades.

Spotify's shares have been trending higher since late 2016, according to people familiar with the private transactions. At that time, the shares traded at levels valuing the company at $6 billion to $7 billion, or about $1,670 apiece. That is below the $8.5 billion valuation the company received when it raised new money in 2015.

But by early 2017, the valuation had jumped to roughly $12 billion, these people said; by the second half of 2017, it was up to $15 billion.

Two of the largest buyers of Spotify's shares in the private markets in the past several years were Tiger Global Management LLC, which has invested about $700 million since 2015, and DIG Investment, a firm that invests on behalf of U.S. and Swedish family offices.

Founders Fund, the venture-capital firm co-founded by PayPal Holdings Inc. co-founder Peter Thiel, and DST Global, run by Russian billionaire Yuri Milner, were also big investors. They exited part or all of their stakes in 2016 when the valuation was $6 billion to $7 billion, people familiar with the trades said. Mr. Milner's firm first invested in Spotify in 2011 when it was valued at $1 billion. It isn't clear at what price Mr. Thiel's firm invested.

Meanwhile, a consortium including private-equity firm TPG, hedge fund Dragoneer Investment Group and clients of Goldman, which lent Spotify $1 billion, converted their debt to shares at a price that valued the company at as much as $13 billion, people familiar with the deal said.

That debt had been designed to convert into stock when the company went public through a traditional IPO. Since Spotify decided to list its shares directly, the debt wouldn't have automatically converted, but Spotify let them do so at the highest possible price, the people said.

Many of the investors in the consortium, including TPG and Dragoneer, are expected to be buyers once Spotify is public, people familiar with the matter said.

Write to Maureen Farrell at


(END) Dow Jones Newswires

February 19, 2018 07:14 ET (12:14 GMT)

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