EFTA02512458

From: Richard Kahn < Sent: Wednesday, March 7, 2018 9:30 PM To: jeffrey E. Subject: Fwd: BAML Spotify Cheat Sheet - UPDATE Richard Kahn HBRK Associates Inc. 575 =exington Avenue 4th Floor New York, NY 10022 tel fax cell Begin forwarded message: From: =/b>"Ens, Amanda" < Subject: =/b>BAML Spotify =heat Sheet - UPDATE Date: =/b>March 7, 2018 at 2:09:53 PM =ST To: = Reply-To: =/b>"Ens, Amanda" < Trading =ommentary (Not a product of BAML Research and should not viewed as a =esearch report) Spotify: Stockholm-based music streaming =ervice Timeline March 15: =nalyst Day (confirmed — Livestream) - Official Listing/Trading =ate likely given Week of March 19 (Tentative): Company sponsored =E2 Investor Education" meetings & potential Research =overage launches by Sell Side Week of March 26 (Tentative): Trading Begins - =dvisors work with Spotify to set initial trade price April 2 (Tentative): Options Trade Financials - Fl riling now publicly =vailable EFTA_R1_01645222 EFTA02512458 2017 Revs: $5B & =ositive FCF $133M — 5-6x trailing revs certainly possible, =mplying $25B+ valuation (In our SOTP for Vivendi we have music at 4x sales or €24bn) Ordinary Shares Outstanding: 176,976,280 reported as of =/22/18 Valuation: At high =nd of recent trading, implies mkt cap $26B+ (very rough estimate). =owever, using current secondary market prices (- $125) implies a market =ap of —$22B (very rough estimate) o Client conversations point to a =20-22B valuation as being a level they might add Source: SEC.gov, F-1 filing - https://www.sec.gov/Archives/edgar/data/1639920/000119312518063=34/d494294dfl.htmtlrom494294_18 Industry Model: Record Labels own New Music =amp; Back Catalog — Distribute thru Spotify & Apple Music =o Consumers — key question is how does Spotify gain control =ver supply? Bull/Bear Views • Bull o Spotify becomes the Netflix of =usic by becoming a record label owning exclusive content — not =he case today and likely cash intensive o Spotify is an aggregator (not =etflix), it's taking a commission on providing all music any =ime you want — pushback likely would be then should be valued =n gross profit multiple Bear o Cash burn / Potential dilution =ices higher than expected as company pivots to become Netflix of music = paying up for performer exclusivity (good) but likely results in =igher than expected cash burn (bad) o Typical consumer model is =dvertising — give service away for free and get 3rd party advertisers to pay =or access to users. Typical business model is SaaS — =ubscription fee. Key for both is marginal cost to add users is =inimal. Due to royalty agreements, marginal costs for Spotify =row with user growth limiting operating leverage from network effect =similar to Lyft/Uber/Airbnb) Competition — =pple Music — Record labels Index Implications In =rder to be included in the S&P 500, a company must have been =rading for at least 12 months following an IPO as well have positive =arnings. As a result, we don't expect any index implications =or SPOT in the S&P 500 until these requirements are met. However, =t should be eligible for the S&P TMI and Completion indices. We are =till looking at implications for FTSE and MSCI based on domicile. Stock Loan Implications Given the structure of the IPO, there may be a delay in =hares settling INTO stock lending programs due to the DWAC process. =Delivery Withdrawal at Custodian). This potential delay will more than =ikely affect the initial Locate Liquidity for a few days. Happy to coordinate calls with John Egan, BAML's =hort Analytics Specialist Expected Trading Dynamics Our understanding is that on the =orning of trading, the Floor Specialist will act like a stabilizing =gent normally would (with banks advising) to help match supply and =emand • • The opening is likely to be very =elayed as we will not know amount of shares to be bought/sold The stock has a decent =robability of trading up significantly on day 1 due to lack of pressure =ram selling shareholders & inability to source a locate Historical Private Share =rading 2017: $37.50 to $125 1/1/18 to 2/22/18: $90 to =132.50 (excl Tencent transaction) Some confusion on share =rices as secondary market =rices are currently -55000/share. Everything in =rospectus reflects a 40-to-one share split (this includes the =eneficiary certificates that the founders own) 2 EFTA_R1_01645223 EFTA02512459 Source: SEC.gov, F-1 filing - https://www.sec.gov/Archives/edgar/data/1639920/000119312518063=span style="" =lass="">434/d494294dfl.htm#rom494294_18 Other tidbits • No deal roadshow, No =nderwriters • No fixed # of securities for =ale No lock-ups except Tencent Music =ntertainment & Tencent (holding for at least 3 yrs from 12/15/17), =ho own - 7.5% Majority Ownership by Founders - =aniel Elk controls 37.3% of shares and Martin Lorentzon controls 43.1% =f the vote. Both founders control 21% of the ordinary shares =utstanding There is language about =eneficiary shares that may be issued to founders on top of shares, but =ould be dilutive and likely to maintain control if/when company does =uture capital-raising Source: SEC.gov, F-1 filing - https://www.sec.gov/Archives/edgar/data/1639920/000119312518063=34/d494294dfl.htm#rom494294_18 Have received a lot of requests =or conference calls & happy to organize calls for those =nterested. Thanks, Alli, =lkesh & Mike Trading Commentary =Not a product of BAML Research and should not viewed as a research =eport) This=material was prepared by Trading personnel of Merrill Lynch and is =ubject to the terms available at the following link: http://corp.bankofamerica.com/business/smb/landing/emaildisclai=er/americas/global-markets This material was prepared by =ash Equity Trading of Merrill Lynch, Pierce, Fenner & Smith, =ncorporated ("ML"). The material is not a publication of BofA Merrill =ynch Global Research, and it has not been reviewed or approved by BofA =errill Lynch Global Research. Any summary of ML Research notes and =eports, and/or any reference or link to BofA Merrill Lynch Global =esearch notes and reports, are qualified in their entirety by the views =f BofA Merrill Lynch Global Research. Any reference to or summary of ML =esearch in this material is qualified in its entirety by the views of =ofA Merrill Lynch Global Research. Please refer to BofA Merrill Lynch =lobal Research for more details (baml.com/markets <http://www.bamIcom/markets> ). The estimated =alues provided in the material are "as of" the date indicated and do =ot represent actual bids or offers by ML. Even though the material is =ased upon publicly available information and news sources that are =enerally believed to be reliable, there can be no assurance that actual =rades could be completed at such value(s). 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Allison =ile Director J US Cash Equities Trading One Bryant =ark 15th Floor I New York, NY 10036 Merrill Lynch, =ierce, Fenner & Smith Incorporated Direct + This message, =nd any attachments, is for the intended recipient(s) only, may contain =nformation that is privileged, confidential and/or proprietary and =ubject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer. If you are =ot the intended recipient, please delete this message. 2612996 4 EFTA_R1_01645225 EFTA02512461