The MBW Review offers our take on some of the music biz’s biggest recent goings-on. This time, we ponder whether the possibility of Universal going it alone from Vivendi is likely to become a reality in the coming months. The MBW Review is supported by FUGA.
Vivendi is feeling pleased as punch with Sir Lucian Grainge.
The British executive led Universal Music Group to record annual sales in 2017 – topping $6bn across publishing and records for the first time in history – while annual EBITA profits leapt up 20.6% at constant currency to €761m ($860m).
Meanwhile, the major’s recorded music streaming revenues more than doubled in the two years from 2015 to 2017 (€954m to €1.97bn) – in line with Spotify‘s own turbo-speed growth.
Speaking to investors following the announcement of UMG’s results in February , Vivendi CEO Arnaud De Puyfontaine publicly declared his faith in the leadership of “the amazing Sir Lucian Grainge”, whose team, he said, continually “develops and spots the best possible artists”.
Making up some 46% of Vivendi’s overall revenue in 2017 (comfortably ahead of Canal+ on 42%) Universal is indisputably the jewel in the crown of the French media giant.
Market dominance, trusted leadership and the headwind of an industry teeming with commercial optimism; for a publicly-traded entity like Vivendi, that probably sounds like the perfect combination.
It also might sound like the perfect time to cash in.
It’s been 10 months since Vivendi Chairman Vincent Bolloré got Wall Street chattering with a peculiar analogy.
When asked at a shareholders’ meeting in Paris whether Universal, with its increasing economic strength, could potentially be ‘spun out’ as a standalone entity on the stock market, the French executive conceded that it was an “interesting” possibility.
He further replied: “The key question for an IPO [like that] is to know when is the best time to do it. It’s like cheese puffs – you have to take them out at the right moment.”
There are a raft of reasons why, for Bolloré – the biggest single shareholder in Vivendi – that right moment may now have arrived.
The most obvious of these, naturally enough, is Spotify.
Daniel Ek‘s company continues to impress on the New York Stock Exchange.
Nearly two weeks after its arrival on the public markets, the streaming firm is standing strong at around $150 per share.
That’s up by around 13% on the highest price traded during Spotify’s pre-NYSE private dealings ($132.50).
Clearly, music is currently a hot property amid the institutional investor community.
So hot, in fact, that Spotify can achieve a $27bn+ valuation, despite the fact it doesn’t actually own any songs.
As whip-smart Round Hill CEO (and experienced financier) Josh Gruss told MBW last month: “Spotify has kind of single-handedly educated Wall Street on the 101 of the music ecosystem.
“That paves the way in the future; it makes it easier for companies to consider going public because you already have an educated investor base.”
There are other positive reasons why Vivendi may take advantage of the buzz around music and spin out UMG via an IPO.
According to De Puyfontaine’s post-earnings address to shareholders in February this year, Universal grew its US market share in 2017 by almost a point – from 35.8% to 36.7%.
(MBW’s own calculation of the major labels’ global revenues in calendar 2017 showed that Universal gained a little share worldwide on a distribution basis – though this didn’t include independents.)
Such momentum, which saw UMG’s global revenues leap by over $500m last year, isn’t showing signs of letting up: last week, Universal-issued albums claimed eight of the Top 10 LPs on the Billboard 200 in the US.
The company also claimed both the No. 1 album (Migos’ Culture II – pictured) and the No. 1 track (Drake’s “God’s Plan”) of Q1 2018 in the US.
Spotify, meanwhile, has already enjoyed bullish analyst forecasts as a public company.
RBC Capital Markets’ Mark Mahaney has slapped a target share price of $220 on the platform, which would value it at over $40bn.
He is far from alone in believing that the streamer will go north of $200 per share.
And yet, if Spotify has one achilles heel amongst Wall Street’s smartest minds, it is the damning Netflix comparison – the one that goes: ‘Spotify has a differentiation problem.’
Spotify doesn’t own any significant original content, and cannot selectively license content to best its rivals because it – like Apple, Amazon and Tidal etc. – already offers 99% of music in existence.
What’s more, no matter how much Daniel Ek revels in the prospect of demolishing the music business’s “gatekeepers”, he’s inevitably going to struggle: the major labels plus indie agency Merlin were responsible for 87% of streams on Spotify last year.
Universal, then, has a sexy story to tell the markets – one paradoxically dependent on, and yet in direct conflict with, Spotify’s own:
‘We own the largest recorded music catalogue in the world, alongside a thriving music publishing operation – and we’re growing our revenues at the same rate as Spotify. Yet, should Apple and Amazon end up eclipsing Spotify, we face no risk; we win either way, and therefore our shareholders will too.’
Vivendi might also do well to take advantage of the Spotify halo effect sooner rather than later because, as much as a giant major record company looks safe in a rebounding global market, there are always risk factors.
One of those risk factors, interestingly enough, is directly linked to Spotify’s success – or, more exactly, its ability to leverage its market power to achieve better gross margins.
Spotify CFO Barry McCarthy says that the labels agreed to margin reductions over the past year that ultimately ended up shifting the royalties vs. Spotify income slider by 7% in 2017 – taking $345m out of rightsholders’ pockets.
There are other risky unknowns for Vivendi out there, too.
What if streaming’s extraordinary global growth, for whatever reason, begins to slow – and those fantastic forecasts from the likes of Goldman Sachs ($28bn in annual subscription revenue by 2030, to remind you) start to dry up?
What if the music business doesn’t get its own way over the YouTube-aiding ‘safe harbor’ laws currently being examined in the European Union? (Something which, according to analyst Mark Mulligan, the majors’ recent Facebook deals could actually end up influencing.)
What if, amongst the 20,000 new tracks uploaded to Spotify every single day, Universal starts to see its market share eroded by indie-distributed artists forcing their way into the so-called “top tier” of Daniel Ek’s service?
And what if superstar artists with expired contracts (and very-much-unexpired legal representation), continue to claw back digits of margin in new-school major label deals?
There are other signs that an IPO for Universal in 2018 might be a timely one, too.
Despite (and largely because) of that 20.6% rise in EBITA profit last year, one financial line in UMG’s annual results stood out as being particularly odd: the company’s CFFO (cash flow from operations) actually fell in the year, down 2.6% to €646m.
When questioned on what caused this anomaly in the subsequent earnings call, Vivendi’s top brass suggested that Universal had been particularly advance-happy in the 12 months.
In other words, it got busy with the check-book to lock down superstar artists to new multi-year deals.
As Vivendi CFO Herve Phillipe described it, this helps to “federalize” the company’s roster.
Such a practice, of course, makes complete business sense on any given day: it secures Universal’s partnerships with the brightest and best talent ahead of what Sir Lucian Grainge and his team hope will be a roaringly successful few years.
But it also naturally maximizes Universal’s valuation – ie. the worth of its combined assets, judged against future earnings – right here, right now.
In November last year, Vivendi CEO Arnaud de Puyfontaine told the Morgan Stanley European Technology, Media and Telecoms conference in Barcelona that he believed – on advice from an unnamed bank – that Universal was now worth more than $40bn.
That, as MBW subsequently pointed out, represented a multiple of around 46-times Universal’s annual EBITA income.
We wrote at the time, with due cause: ‘Arnaud De Puyfontaine is severely testing the boundary between bloated modern market interest in music rights… and utter fiction.’
This, however, was five months before Spotify went public.
Today, a music-centric company that’s never posted a profit, and arguably has no obvious path to making one, has nailed a near-$30bn market cap on the New York Stock Exchange.
Even more impressively, for now, it’s managed to sustain it.
So with that in mind, who’s to say?
Maybe Arnaud De Puyfontaine knew something we didn’t: when everyone wants to get their hands on your cheese puffs, you can charge pretty much what you like for them.
