Universal Music Needs to Break Out
(Bloomberg Opinion) -- Vivendi SA has spent 18 months tantalizing investors with the prospect of a sale of its stake in Universal Music Group.
It's hard to believe it coincidental that the French media conglomerate is finally ready to dance just a month after Spotify Technology SA went public. So far, the music streaming service's non-IPO has been broadly successful. Despite being unprofitable, Spotify enjoys a market value of $24 billion.
After a cryptic announcement hinting at the possibility of a divestment earlier this month, Vivendi CEO Arnaud de Puyfontaine shed some light on his plans on a conference call Thursday.
He ruled out a sale of the division, and instead outlined three options: a partial IPO, a sale of a stake to a third party, or taking on a partner. To me, the first two options seem likeliest. The third hints at a closer tie-up with Spotify -- but I doubt the latter would want to play favorites with a record label.
With UMG enjoying a 13 percent operating profit margin on its 5.7 billion euros ($6.7 billion) in sales, you can see why the comparison with Spotify casts it in a good light. Apply the same revenue multiple as its rival, and Universal Music is worth about $39 billion -- close to the $40 billion valuation Vivendi CEO's has put on the business. Even if that valuation proves to be wishful thinking, it highlights the discount investors place on the French company: Vivendi’s own market value is only about $35 billion.
But the timing is opportune for other reasons, too. The three major record labels (Sony and Warner Music being the other two) own the lion's share of what's streamed on Spotify. That gives them a vast amount of power. Indeed, one of the reasons that Spotify remains unprofitable is that as much as 80 percent of its revenue gets passed straight to the record labels and publishers as royalties.
The upstart has dropped hints about bringing more music production in house. But for now, the labels hold the keys, and investors will recognize that. Sure, Spotify might be able to sign some new artists, but the size of UMG's back catalog represents a significant competitive moat. That's why now is a good time to capitalize on it – should the barrier be breached, the French company's shareholders investors will have been able to capitalize on a valuable asset.
Vivendi has also retained a stake in Spotify, suggesting that de Puyfontaine may seek a closer collaboration. I'd be wary of such an attempt: an effort to create a content alliance with Telecom Italia SpA, in which Vivendi also owns a sizable stake, has already foundered.
Let's hope that, rather than simply dangling a carrot in front of investors, Vivendi is actually serious about making the most of UMG before the music stops.
©2018 Bloomberg L.P.