When Vivendi rejected an $ 8.5 billion offer from SoftBank to buy Universal Music Group in 2013, analysts and industry executives were taken aback.
The French group refuse a price that was $ 2-3 billion more than analysts’ estimates of Universal. Hammered by the piracy brought on by the advent of the Internet, music revenues have declined every year for more than a decade – and no turnaround was in sight.
Eight years later, the bet against the current of Vivendi and its controlling shareholder, the French billionaire Vincent Bolloré, promises to be brilliant.
On Tuesday, the group will sell 60% of Universal and list it on the Euronext Amsterdam stock exchange. The prospectus gives Universal an indicative valuation of 33 billion euros, but analysts believe it is worth much more – JPMorgan puts it at 54 billion euros.
Each Vivendi shareholder will get one share in the newly independent company. The Bolloré Group will own 18% and Vivendi 10%.
There is no official lock-up for major shareholders, but Vivendi has pledged not to sell any shares for two years and analysts expect a period of stability.
The music industry has made a dramatic comeback since streaming services began funneling billions of dollars to its biggest companies – Universal Music, Sony Music, and Warner Music – who own the copyrights for most. songs of the world.
Their owners have taken note. Leonard Blavatnik, the billionaire majority shareholder of Warner Music, brought the third-largest music company to the stock exchange last year. His net worth jumped $ 7.5 billion on the first day of trading, Bloomberg said.
Bolloré and Vivendi also profited. Vivendi has sold a third of Universal since 2019 for around € 9 billion, first selling 20% to a consortium led by Tencent for a valuation of € 30 billion in 2019 and 2020 then sell a 10 percent of the capital to Bill Ackman’s Pershing Square hedge fund for a valuation of 35 billion euros in 2021.
The agreements have also transformed the wealth of Lucian Grainge, Managing Director of Universal. He received 17 million euros for negotiating the Tencent deal and is expected to receive a $ 150 million bonus for signing up.
The case of these agreements is obvious. Sales of recorded music, which reached $ 14 billion in 2014, accelerated to $ 21 billion in 2020, according to data from the International Federation of the Phonographic Industry (IFPI). Streaming accounts for the bulk of that revenue, reaching $ 13.4 billion in 2020, up 20% year on year.
Global sales are still below their 1999 peak, but investors are beginning to forget the Napster and iTunes era where piracy was rampant and CD sales plummeted.
However, the valuations of the three dominant label groups had not really been upgraded to match this growth. Universal and Sony Music were owned by larger French and Japanese conglomerates, while Warner Music was privately owned by Access Industries of Blavatnik. Investors could not easily bet on the renaissance of music.
Spotify IPO in 2018 changed that, but the Swedish company sells music subscriptions – not the music itself. Public offerings from two of the three major label groups give a clearer picture of how far the industry has come.
“No large catalog of master recordings has changed hands [since EMI in 2012]”Said a senior music executive.” There was no luck resetting the value based on where the streaming took it. “
Investors dance to the beat of the music
Wall Street analysts salivate on Universal. JPMorgan called the company an “extraordinary asset”, predicting that its valuation of 54 billion euros “will prove to be prudent”. UBS has rated Universal’s “irreplaceable” catalog, valuing it at 45 billion euros. Bank of America valued Universal at 50 billion euros, a 30% premium for Warner Music.
The euphoria rests on a simple premise: As more people pay for streaming to apps like Spotify, the value of music rights will increase. And Universal is the world’s largest music rights holder.
The Californian group controlled 36% of the recorded music market in 2020, according to the IFPI. His roster includes The Beatles, Kendrick Lamar, Taylor Swift and Olivia Rodrigo. All of the top 10 best-selling artists from last year were signed to Universal.
Record companies now make money mainly by collecting royalties from technology companies. Spotify and Apple Music donate more than two-thirds of every dollar earned to music rights holders. In recent years, Universal has also made deals with social media apps like TikTok and Facebook as well as fitness groups like Peloton, which pay to use songs on their platforms.
This model is more profitable than the CD era because Universal no longer has to spend money on physical distribution. Profit margins fell from 16 percent in 2018 to 20 percent in 2020. He forecasted annual growth in income in the “high numbers” and earnings before interest, taxes, depreciation and amortization in the “middle in their twenties ”in the years to come. years.
Music executives also argue that streaming makes their earnings more predictable and less dependent on the rating of hit albums.
“Music is now a utility. . . everyone is happy to pay their $ 10 per month, ”said Merck Mercuriadis, head of Hipgnosis Song Acquisition Fund which has swallowed up song catalogs in recent years at sparkling prices. “I think Universal will end up being a $ 100 billion company in a very, very short time,” he added.
However, per capita music spending remains below its peak in the United States, according to JPMorgan. In 1999, per capita recorded music revenues were $ 81 on an inflation-adjusted basis, well above the $ 37 spent last year.
Almost half of Universal’s recorded music revenue comes from music less than three years old, which means it needs to keep investing in finding new talent.
Universal’s turnover rose from € 6 billion in 2018 to € 7.4 billion in 2020. However, it also spent € 2.5 billion on catalog acquisitions and advance sales. artists during the year, including resigning stars like Taylor Swift and paying over $ 300 million to buy. Bob Dylan’s Songwriting Catalog.
Will the streaming dream turn sour?
The big question is: why the scramble for listing now? Skeptics say the deals are an admission that valuations are at their peak and that music owners hope to cash in before investor enthusiasm dies down.
Guy Hands, the private equity chief behind a disastrous takeover of EMI in the late 2000s, praised Universal’s turnaround but added, “I can’t believe anyone could have expect prices to reach today’s level. Anyone in their right mind would certainly reduce their exposure.
Some analysts warn of the risks to Universal’s future growth as emerging markets become bigger drivers of the streaming market.
With more established streaming markets such as Sweden reaching saturation, music companies are looking to India, China and other populous, low- and middle-income countries to add new subscriptions. China is the world’s seventh largest music market by revenue, but analysts predict it will rank in the top five and possibly the top three. However, subscribers pay significantly less to stream in these regions, reducing the average income earned per user.
These markets revolve around local acts. Universal has invested in the development of talents to be discovered, joint ventures on strike in China with Tencent, for example. However, “betting on China is a risky proposition,” warned Bill Werde, the former editor of Billboard magazine who now runs a music program at Syracuse University.
“All of what is being sold to potential investors in the music industry right now is the belief in the global future of music streaming,” he said. “It’s not entirely wrong, but it’s also heavier than most people realize.”
There is also a lingering fear that the internet will encourage more artists to bypass record companies. The share of Spotify streams captured by dominant labels and Merlin, a group representing independent labels, has declined from 87% in 2017 to 78% in 2020.
For now, Wall Street has brushed aside this concern. “While a small group of top performers can potentially bypass music companies by going directly to the consumer, doing so on a large scale and on a sustainable basis remains a daunting exercise,” analysts said. Societe Generale.
When asked by The Financial Times if the music market had peaked in this cycle, Grainge unsurprisingly dismissed the idea. The company was making money from new sources, he argued, such as video games, fitness apps and social media companies.
“I’ve been through two recessions and two downturns. I know what can go wrong, ”he said. “We’re just opening up new areas of monetization that we couldn’t even foresee before. “