Tencent-Vivendi Deal Will Give Universal Music a Boost in Asia

(Bloomberg) --

Tencent Holdings Ltd. plans to buy 10% of Universal Music Group from Vivendi SA in a deal that would value the world’s biggest music company at $34 billion and help it tap fast-growing Asian markets.

The discussions with China’s most valuable company will reinvigorate the French media giant’s efforts to find new partners for its most successful business. But they may also sound alarms in the U.S., the world’s biggest music market, amid a deepening trade war with China.

A surge in subscription music streaming has revived the fortunes of big music labels in Western markets, and Universal is now looking for further growth. Vivendi said it’s discussing cooperation with Tencent and wants the Chinese company to promote Universal’s stable of artists -- including Drake, Taylor Swift and U2 -- and identify talent in new markets.

“Tencent as a partner will boost UMG’s value because of the access it provides in China,” said Vey-Sern Ling, a Bloomberg Intelligence analyst based in Hong Kong. A purely financial investor may have to pay more than Tencent would pay for its stake, Ling said. The companies are discussing a deal that would value all of Universal Music at 30 billion euros ($34 billion).

Vivendi shares rose as much as 9% in early trading Tuesday and were up 6.6% at 25.6 euros as of 12:20 p.m. in Paris.

Trade Tension

Vivendi sees little risk that the U.S. authorities could block the deal as part of Washington’s wider trade conflict with Beijing, because the Tencent stake is limited to 10% for now, two people with knowledge of the companies’ discussions said. In its statement Tuesday, Vivendi said Tencent could double its holding on the same terms within one year.

The French company has struggled to draw interest from private-equity firms, and Bloomberg reported in May that Vivendi was targeting strategic buyers including Tencent. The preliminary discussions with the Chinese company are likely to stir interest from other potential partners.

Streaming is helping the music industry recover from a slump caused by illegal downloading and a collapse in CD sales. Universal Music now contributes around 44% of Vivendi’s revenue. Universal Music’s sales rose by around 19% in the first half, helped by releases from artists including the 17-year-old singer Billie Eilish and the Japanese band King & Prince.

What Bloomberg Intelligence Says:

Vivendi’s planned sale of as much as 50% of Universal Music could yield a potential windfall of $10-15 billion, with a large chunk of any proceeds probably directed toward a share-repurchase program that’s already set for a big boost.
-- Matthew Bloxham, media analyst
Click here for the research

Tencent, China’s largest social-media company, is also big in streaming. Last year it floated its Tencent Music Entertainment Group, whose growth in China mirrors that of Spotify Technology SA in the U.S. and Europe.

While Spotify relies heavily on paid subscriptions, last year Tencent Music generated 71% of its revenue from a category called “social entertainment” -- things like online live music and interviews with celebrities. Tencent already works with Universal Music on distribution and marketing in China under a cooperation deal sealed in 2017.

“Having a toe-hold in Universal would allow Tencent to ensure Universal’s content is always available to TME and even to Spotify, in which Tencent owns a stake,” said Sumeet Singh, an analyst with Singapore-based Aequitas Research.

Vivendi Gains After Strong Performance at Universal Music Group

Universal Music’s growth has helped offset a weaker performance at Vivendi’s other businesses. The company’s market value at Monday’s close was 29.2 billion euros, less than the music unit’s equity value of 30 billion euros implied by the Tencent deal. Other Vivendi units include Havas SA, an advertising group, and the broadcaster Canal Plus.

Vivendi’s board and its biggest shareholder, French billionaire Vincent Bollore, “continue to be steadfast supporters of our strategy, our work and our teams,” Universal Music’s Chief Executive Officer Lucian Grainge told staff in a memo seen by Bloomberg News and confirmed by a company spokesman.

--With assistance from Gaurav Panchal, Stefan Nicola, Zheping Huang, Angelina Rascouet and Cecilia Esquivel.

To contact the reporters on this story: Thomas Pfeiffer in London at tpfeiffer3@bloomberg.net;Angelina Rascouet in Paris at arascouet1@bloomberg.net

To contact the editors responsible for this story: Rebecca Penty at rpenty@bloomberg.net, Paul Sillitoe

©2019 Bloomberg L.P.