Earlier today (12/31/19), Vivendi announced an agreement to sell 10% of Universal
Music Group to a consortium led by Tencent at an equity valuation of 30 bn euros.
The deal also includes an option to sell an additional 10% to the consortium at the
same valuation at any time before 1/15/21. This deal with Tencent had been in the
works for most of 2019, but was expected to be closed weeks or months ago, which
led some investors to question whether there would be a haircut to the rumored 30
bn valuation or if the whole deal would be taken up by strategic investor Tencent
alone, with no one else willing to pay a price viewed as too rich. The presence of
other investors, especially financial ones, in addition to Tencent further validates
the 30 bn euros valuation of UMG, which equates to roughly 20x forward EBITDA.
While the financial investors were not disclosed in today’s press release, they are
rumored to be the sovereign funds of Singapore and Qatar. Plugging 30 bn euros for
UMG into a SOTP valuation yields an equity valuation of 33.61, approximately 30%
upside from today’s close. While some HoldCo discount is appropriate, and a 15%
HoldCo discount would imply a one year target of 28.57 euro, and only 10% upside
from today’s close, the real opportunity here lies in the future appreciation of the
UMG asset, which is a true jewel, and was enhanced today with the culmination of
the Tencent deal, which should enhance opportunities for future growth in the
currently underexploited Chinese market. Rolling out 3-5 years, if the global
streaming subscription music market evolves as bullish observers expect it to, it’s
not hard to imagine UMG appreciating to 45 bn euros in value, at which point shares
would be worth 43.50 euro with no HoldCo discount, or 37.00 with a 15% HoldCo
discount, holding everything else equal.
For those unfamiliar with the recent history of the music business, I would refer you
to VIC member avahaz’s write up from 8/29/17, which offers a good overview of
UMG and Vivendi’s other businesses. To summarize a very long and complicated
history of music in the developed markets…people used to buy physical media
(albums then cassettes then CDs). The music business was hit-driven and volatile.
People would buy physical media once, and listen to it forever. Music publishers
would have to take the risk of making physical units ahead of unknown demand, and
could be stuffed with returns if there was a flop. Tons of advertising and
promotional spending went into new releases; in addition to the continual artist
development (A&R) spending that was required to keep the roster of artists current.
When digital music came along, it was a great opportunity to increase margins.
While A&R (artist and repertoire) and A&P (advertising and promotion) costs
would remain, the physical production and distribution costs would be eliminated.
It was theoretically great except that two factors killed revenues: piracy and
unbundling (where a fan would buy the two best tracks off an album for 99c each
versus the whole album for $9.99 or more). But the industry has come back with the
advent of paid streaming services like Spotify and Apple Music. For $10/month, the
customer can have access to almost all recorded music ever created in their pocket.
It is a much better experience than spending $10 to own one album, and the
resistance to paying for media has dissipated somewhat as people have gotten used
to paying for multiple streaming video services. When you are paying $7-10 per
month or more each to get Netflix, Hulu, Disney+, etc., getting all the music in the
world for $10 seems less objectionable. Music companies generally get about $7 out