The Paradox Behind Universal Music's $33 Billion Price Tag

(Bloomberg) -- French billionaire Vincent Bollore is valuing his Universal Music Group at 30 billion euros ($33 billion). Investors appear to disagree.

They’re ascribing approximately the same amount to Vivendi SA, of which Universal Music is only one part. Vivendi also houses one of the world’s biggest advertising groups, Havas, dominant French pay-TV company Canal+ Group, a video game maker and almost a quarter of Italy’s biggest telecommunications company.

The Paradox Behind Universal Music's $33 Billion Price Tag

The price being discussed for the world’s biggest music company in stake sale talks with China’s Tencent Holdings Ltd. compares with a current Vivendi market capitalization of 30.4 billion euros. That would suggest Vivendi’s other businesses are worth almost nothing, even though they generated 7.9 billion euros of sales last year.

The Paradox Behind Universal Music's $33 Billion Price Tag

One explanation is that the market is applying a heavy discount to the diverse array of assets that Bollore controls. Some analysts see little economic benefit in combining a music business with an ad group, a telecom company and a broadcaster. What’s more, there’s a risk premium to be paid for sharing ownership with a veteran corporate raider who has a long record of clashes with other investors.

“The elephant in the room is the holding discount, which is typical for a conglomerate such as Vivendi,” said Giasone Salati, a Macquarie analyst who has a sell rating on Vivendi. “You also have to take into account that the anchor shareholder is Bollore, whose corporate governance practices have raised red flags in the past.”

A spokesman for Vivendi declined to comment.

Much of Bollore’s $4.7 billion fortune derives from Vivendi, in which he has a minority stake of 26.3% yet enough voting rights to call the shots.

Universal Music may deserve a big premium over the group’s other assets. The Havas ad business is under attack from big tech firms and management consultancies, while Netflix Inc. is taking TV viewers from Canal+.

The valuation underlying the Tencent talks is driven by confidence that a revival in global music sales will continue. Subscription streaming has brought new income that is starting to replace business lost to illegal downloading and the collapse of CD sales.

The Paradox Behind Universal Music's $33 Billion Price Tag

It’s still unclear if the revival will endure. Until the Tencent talks began last month, analyst estimates for Universal Music’s value ranged from $20 billion to $50 billion.

The issue of valuation drove some private equity firms to walk away from the sale process. Vivendi has hired French banks to help it find other potential buyers alongside Tencent, Bloomberg reported on Sept. 4. Vivendi still aims to sell only a minority stake, so Bollore will keep overall control.

“Assuming the deal with Tencent closes, there’s not that much suspense left,” said Conor O’Shea, an analyst at Kepler Cheuvreux. “Perhaps investors are also a bit disappointed that Vivendi isn’t selling a bigger stake in UMG, beyond the potential 20% that Tencent could buy.”

©2019 Bloomberg L.P.

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