Industry analysts and executives were confused when Vivendi rejected SoftBank’s offer to acquire Universal Music Group for $ 8.5 billion in 2013.
French group refused It was $ 2 to $ 3 billion higher than analysts’ Universal rating. Struck by piracy brought about by the advent of the Internet, music revenues have shrunk every year for over a decade, with no turnaround.
Eight years later, the contrarian bet by Vivendi and its controlling shareholder Vincent Bolloré in France looks spectacular.
On Tuesday, the group will spin out 60% of Universal and list on the Euronext Amsterdam exchange. The prospectus gives Universal an indicator of € 33 billion, but analysts believe it is far more valuable — JP Morgan puts it at € 54 billion.
Each Vivendi shareholder will acquire one share of a new independent company. The Borole Group owns 18% and Vivendi owns 10%.
There is no official lockup for major shareholders, but Vivendi has promised not to sell its shares for two years, and analysts expect a stable period.
The music industry has made a dramatic comeback since streaming services began pouring billions of dollars into the largest copyrighted companies in the world, Universal Music, Sony Music and Warner Music. ..
Their owners are paying attention. Leonardo Bravatonic, the controlling shareholder of Warner Music’s billionaire, listed its third largest music company last year.His net worth surged $ 7.5 billion First day of trading, Bloomberg estimates.
Bollore and Vivendi are also raising money. Vivendi has sold one-third of Universal for around € 9 billion since 2019, first selling 20% to a Tencent-led consortium at a valuation of € 30 billion. 2019 And will be sold in 2020 10% stake Bill Ackman’s hedge fund Pursing Square in 2021 with a valuation of 35 billion euros.
Trading has also changed wealth Lucian Grainge, Universal CEO. He will receive € 17 million in negotiations for Tencent’s transaction and a $ 150 million bonus on listing.
Obviously for these transactions. Recorded music sales bottomed out at $ 14 billion in 2014 and are accelerating to $ 21 billion in 2020, according to data from the International Federation of Phonographic Industry (IFPI). Streaming accounts for the majority of its revenue, growing 20% year-on-year to $ 13.4 billion in 2020.
Global sales are still below their 1999 peak, but investors are beginning to forget about the days of Napster and iTunes, where piracy was rampant and CD sales were declining.
However, the valuations of the three major label groups did not actually change prices in line with this growth. Universal Music and Sony Music are within large conglomerates of France and Japan, and Warner Music was personally managed by Bravatonic’s Access Industries. Investors couldn’t easily bet on the music renaissance.
Spotify 2018 Stock Market Listing I changed that, but the Swedish company sells music subscriptions, not the music itself. Public offerings from two of the three major label groups give you a clearer picture of how far the industry has progressed.
“The big master recording catalog hasn’t changed. [since EMI in 2012]”A senior music executive said. “I didn’t have the opportunity to reset the value based on where the streaming took.”
Investors dance when music plays
Wall Street analysts are saliva through Universal. JPMorgan called the company a “special asset” and predicted that the € 54 billion valuation would “prove to be conservative.” UBS focused on Universal’s “irreplaceable” catalog and valued it at € 45 billion. Bank of America rates Universal at € 50 billion. This is a 30% premium for Warner Music.
The euphoria is based on a simple premise. As more people pay for streaming on apps like Spotify, the value of their music rights increases. And Universal is the world’s largest owner of music rights.
According to IFPI, the California-based group dominated 36% of the music market recorded in 2020. The roster includes The Beatles, Kendrick Lamar, Taylor Swift and Olivia Rodrigo. Last year’s top 10 top-selling artists all signed Universal.
Record labels currently make money primarily by collecting royalties from tech companies. Spotify and Apple Music pay music rights owners more than two-thirds of the $ 1 they earn. In recent years, Universal has also dealt with social media apps such as TikTok and Facebook, and fitness groups such as Peloton, who are paying to use songs on the platform.
This model is more profitable than in the CD era because Universal no longer has to spend money on logistics. The rate of return increased from 16% in 2018 to 20% in 2020. As a result, annual earnings are expected to increase to the “late single digits” and profit margins before interest, taxes and depreciation are expected to increase to the “mid-20s”. Year.
Music executives also argue that streaming makes revenue more predictable and less reliant on hit album scoring.
“Music is now a utility … Everyone is happy to pay $ 10 a month,” said the head of Mercuriadis. Acquired Hipgnosis Songs Fund It has been devouring song catalogs in recent years at bubbling prices. “I think Universal will be a $ 100 billion company with very short orders,” he added.
However, according to JP Morgan, per capita music spending is below its peak in the United States. Music revenue per capita recorded in 1999 was $ 81 on an inflation-adjusted basis, well above last year’s $ 37.
Almost half of Universal’s recorded music revenue comes from less than three years of music. In short, you need to keep investing to find new talent.
Universal’s revenue surged from € 6 billion in 2018 to € 7.4 billion in 2020. However, it also spent € 2.5 billion on catalog acquisition and artist progress, including resigning stars such as Taylor Swift and purchasing over $ 300 million. Bob Dylan’s songwriting catalog.
Is your streaming dream sour?
The big question is why the races we are listing now. Skeptics admit that these deals have peaked in valuation, and music owners want investor enthusiasm to monetize before putting out putters.
Guy Hands, a private equity executive behind the disastrous acquisition of EMI in the late 2000s, praises Universal’s turnaround, adding: Any wise person will certainly reduce their exposure. ”
Some analysts warn of risks to Universal’s future growth as emerging markets become a greater driver of the streaming market.
As more established streaming markets such as Sweden have reached saturation, music companies are calling for new subscriptions in India, China and other populous low- and middle-income countries. China is the world’s seventh-largest music market in terms of revenue, but analysts predict that China will be in the top five, and perhaps eventually in the top three. However, subscribers pay much less to stream in these regions, lowering average revenue per user.
These markets are centered around local conduct. Universal has invested in the development of waving talent. Impressive joint venture For example, in China there is Tencent. But “betting on China is a dangerous proposal,” warned Bill Welde, a former Billboard editor who currently oversees music programs at Syracuse University.
“Everything that is currently sold to potential investors in the music industry is a belief in the global future of streaming music,” he said. “It’s not completely wrong, but it’s more annoying than most people understand.”
There is also the persistent fear that the Internet will drive more artists to bypass record labels. The share of Spotify streams captured by Merlin, the leading group of dominant and indie labels, has dropped from 87% in 2017 to 78% in 2020.
For now, Wall Street has dispelled this concern. An analyst at Societe Generale said:
When asked by the Financial Times if the music market peaked in this cycle, Grainge naturally rejected the concept. He claimed that the company was making money from new sources such as video games, fitness apps and social media companies.
“I have experienced two recessions and two recessions. I know what goes wrong,” he said. “We are opening up new areas of monetization that were previously unpredictable.”
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