NEW YORK (REUTERS) - Music streaming service Spotify, most recently valued at $13 billion (S$18 billion), will be the first major company to carry out a direct listing on the New York Stock Exchange when it goes public later this year or early next year, two sources familiar with the situation said on Friday.
The move is set to be the biggest test yet for the relatively new process of direct listing, which eliminates the need for a Wall Street bank or broker to underwrite an initial public offering (IPO) and many of the fees associated with it. If successful, it could change the way companies approach selling shares to the public.
The Swedish technology firm is working with investment banks Morgan Stanley, Goldman Sachs Group Inc and Allen & Co to advise them on the process, the sources said.
Spotify, the New York Stock Exchange, Morgan Stanley and Goldman declined comment. Allen & Co did not immediately respond to a request for comment
In a traditional IPO, investment bank underwriters are paid to sell new shares of a company to the public at a price they determine based on feedback from investors. The underwriters who lead this process are backed by an IPO syndicate, sometimes comprising more than a dozen banks, which share the responsibility of selling and allocating shares to investors.
In a direct listing, a company does not raise money by offering new shares for sale, but instead makes its existing shares immediately available to the public, meaning employees and investors can buy and sell as they wish. That simplified process dispenses with the need for banks to market and sell the company's shares.
Spotify's decision to side-step underwriters could be a hit to investment banks that rely on fees from marquee listings such as
Spotify, particularly as the number of IPOs have declined. Proceeds from IPOs were down 40 per cent last year from 2015. Technology IPOs, often a large chunk of the market, were down 56 percent, according to Thomson Reuters data.
Direct listings are not without risk. Without investment banks guiding the process of determining the IPO price, the sale of shares is potentially exposed to more market volatility. There is also no "lock-up" period, which is designed to prevent early-stage investors and employees from selling their stock in the months following a listing.
Without that, a stock could experience heavy turnover and fluctuation in price if investors or employees flood the market with shares as the company is just getting its public market footing. Direct listings also do not cut out all Wall Street costs. Investment banks still advise companies on how to get their financials in order and how to articulate why they are a good investment, even if the banks do not get involved in building up company's materials to show investors at what are known as"roadshows."
Spotify, which has yet to post a profit as it expands in markets worldwide and builds new offices in New York, lost 173 million euros (S$265 million ) in 2015, according to the latest figures disclosed by its Luxembourg-based holding company. In recent months, it has sought to build up its service by striking deals with some of the largest music labels.
In April, it announced a licensing deal with Universal Music Group that could make the streaming platform more attractive to its top-selling artists, including Taylor Swift, Adele, Lady Gaga, Coldplay and Kanye West, by letting them release albums exclusively to paying premium users.
Spotify hopes to also strike deals with Warner Music Group and Sony Music in the run up to the IPO, according to one of the sources.