Vivendi Shareholders Finally Hear a Sweet Tune
(Bloomberg Opinion) -- Vivendi SA investors should be sighing with relief.
The French media conglomerate announced on Tuesday that it plans to sell 10% of its Universal Music Group record label to a group led by Tencent Holdings Ltd., the Chinese internet giant. The 3 billion euro purchase ($3.4 billion) implies an equity valuation of 30 billion euros for all of UMG, as the music business is known. As my Bloomberg Opinion colleague Alex Webb wrote in August, Vivendi should gain strategic and financial advantage from the alliance with Tencent.
Shareholders of Vivendi should be smiling that a deal got done at all. Vivendi first announced in mid-2018 plans to sell as much as half of UMG, which is home to musicians such as Drake and Lady Gaga. The process didn’t move quickly or in a straight line.
Earlier this year, private equity investors and sovereign wealth funds became annoyed over what some potential suitors saw as a pricey deal and the slow pace of negotiations. That left fewer potential investors for UMG. Rich technology companies with an interest in music, including Google and Amazon.com Inc., were unlikely investors for UMG.
When it announced the Tencent deal on Tuesday, Vivendi said it would look to sell a further minority stake at the price agreed to by Tencent or higher. The Tencent-led group has the option to buy up to 10% more of UMG in the next year at the same price. Vivendi, in short, has now set a floor on the value of UMG, and by extrapolation for Vivendi at large.
Vivendi shares in Paris inched up slightly after the announced investment. Vivendi’s total market capitalization of about 30.6 billion euros implies that assets accounting for about 55% of Vivendi’s revenue — including the Canal+ broadcast group, the Havas advertising agency and a collection of publishing companies — are essentially valued at almost zero. The conglomerate discount on Vivendi and its mercurial controlling shareholder Vincent Bollore is likely to persist.
UMG and the rest of the Big Three music labels — Warner Music Group Corp. and Sony Music Entertainment — remain in an odd spot. Technology changes that wrecked their business models have now helped revive them, but there is much more potentially wrenching change to come in the industry.
Paid streaming music services such as Spotify and others have helped global record label revenue grow significantly for the first time since the 1990s, but industry revenue remains lower than it was at the peak of CD popularity more than 15 years ago. The record labels remain in a constant tug-of-war with technology companies that want to license music for apps such as TikTok and for internet services that are both expressly devoted to music and those that are not, including YouTube, which by some measure is the most popular music-listening spot in the world.
Meanwhile, Spotify and other young streaming companies are trying slowly to cut out the record labels and strike deals directly with musicians. Streaming music companies constantly want to lower the fees they pay labels for the rights to songs; the music majors are constantly fighting for higher rates.
Those strategic challenges won’t go away, nor will the imperative for the music industry to structurally change a business model still built in many way for the old mode of artist discovery, promotion and publishing. But Vivendi’s new partner can be a useful ally for a UMG’s expansion in China, a lucrative but tricky market for foreign music companies. Asia represented just 13% of UMG’s 2018 sales.
Among Tencent’s large roster of investments is the separately listed streaming music service Tencent Music Entertainment. U.S.-listed depository receipts of that company rose 3% in early market trading Tuesday. Tencent Music is part of the consortium that is buying the stake in UMG and will have an option to buy a minority stake in UMG’s China business.
The big price tag for Universal Music is a testament to the improving fortunes of the music industry. Once written off as has-beens, the music majors are in a better position than they have been for years. The question now for Vivendi investors is whether the Tencent deal will mark a new lucrative phase for Universal and other music industry powers, or if it’s a sign of a peak.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.
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