The MBW Review gives our take on some of the music biz’s biggest recent goings-on. This week, UMG parent Vivendi announced that the music company had been valued at as much as €20bn ($20bn). The MBW Review is supported by FUGA.
That’s a whopping 31-times multiple on Universal’s last annual EBITDA of €644m ($700m).
Makes you think: why would someone part with such a gigantic sum to ingest Sir Lucian Grainge‘s company?
According to Vivendi, that’s not on the cards: the valuation apparently came from banks encouraging Vincent Bollore and co. to float UMG on the stock market. (As if the music industry doesn’t have enough hopeful IPO attempts going on right now…)
However, other bankers are reportedly telling Vivendi to sell off 10-15% of Universal to realize a chunk of cash – which the French group could then use to fund acquisitions.
You have to question why Vivendi took the decision to plonk such a public pricetag on Universal this week – unless it was in the hope of stimulating some acquisitive interest.
So… who might be interested in splashing the cash on an acquisition or part-acquisition?
A few possible suitors are already swirling around the rumor mill…
1) Asia’s Commercial giants
One name doing the rounds today is Alibaba, the world’s biggest e-commerce platform.
In FY 2016 (the 12 months to end of March last year) the China-born Amazon rival hosted $485bn in gross online transactions – while capturing $15.7bn of its own revenue.
Sources close to the company tell MBW that a large-scale music rights acquisition has been considered of strategic interest to the company for some time.
At the end of last year, we learned that the Alibaba Digital Media and Entertainment Group – a smaller affiliate of Alibaba’s main business – planned to invest more than 50 billion yuan ($7.2 billion) in content over the next three years.
That’s some distance away from Vivendi’s favorable valuation of UMG – but it’s comfortably enough to grab a 15% stake.
Worth mentioning that the Alibaba affiliate’s CEO, Yu Yongfu, said in a private email last year that, when it came to entertainment buyouts, he “didn’t come to play”.
The Alibaba Digital Media and Entertainment Group already owns a music streaming service, Alibaba Music, in addition to other content-based subsidiaries such as Alibaba Literature and Alibaba Pictures.
There’s more money in the kitty, too: earlier this year, Alibaba Group confirmed that as of December 31, 2016, it was holding cash, cash equivalents and short-term investments worth US $19.95bn.
Another potential suitor from Asia is Tencent – China’s largest company, with a market cap in excess of $250bn.
Tencent occupies a unique position in the Chinese music market: the firm runs its own music platforms in the region, and is also the exclusive music licensing partner for Sony and Warner – getting to decide which services the majors’ catalogues end up on.
A sale of 10%-15% of Universal would be very appealing to Tencent.
We know so – as we’ve heard it straight from the horse’s mouth.
“We wouldn’t mind exploring an investment, like owning a small portion of a music label’s shares – 10, 20 or 30%.”
Andy Ng, Tencent
Earlier this year, MBW asked Tencent’s VP of Music, Andy Ng, whether the company was interested in an all-out music rights acquisition.
“We’ve debated this internally many times over the last few years,” he said.
“In general, we have decided that Tencent is not interested in acquiring music labels outright… labels compete with each other and if one day Tencent bought one of the majors, the others would think we are a competitor.“
However, he added: “We wouldn’t mind exploring an investment, like owning a small portion of a music label’s shares – 10%, 20% or 30%.
“We’d consider investing in a really important music label that could create different strategic partnerships with, not only for our music service, but also using the IP of artists in the games or filming business.”
With an artist roster ranging from The Rolling Stones to Katy Perry (pictured), Drake and Justin Bieber, music labels don’t come any more important than Universal.
2) A digital platform…
The prospect of Apple or Google buying their way into a major music company would surely cause pandemonium in the industry – as inevitable accusations of anti-competitive behavior began to fly.
Yet it’s not beyond the realm of possibility: last year, we learned that Google had, at one stage, made a speculative approach to buy 50% of Sony/ATV’s rights during a buy/sell phase between Sony Corp and the Jackson Estate.
Greenberg Traurig lawyer Joel Katz told the crowd at Midem: “It would have been a very interesting proposition, with [Google] having a major interest in a major publishing company like that… then negotiating their licenses with the record companies and saying: ‘Hey, we don’t have to license you!’
“Of course, it didn’t happen… Sony didn’t let it happen.”
“It would have been a very interesting proposition, with [Google] having a major interest in a major publishing company like [Sony/ATV].”
Joel Katz, Greenberg Traurig
It seems unlikely that Universal would grant Google any more leeway than Sony; especially as the European Commission is currently readying its ultimate decision over the future of EU safe harbor laws – which have artists and rights-holders alike up in arms.
A deal with Apple, meanwhile, risks driving the loyalty of UMG’s rival rights-holders away from Apple Music and into the arms of its rivals.
Ultimately, however, all of the major labels need Apple to thrive for the record business’s recovery to continue – and the Cupertino giant does seem keen on paddling its way into rights ownership.
After Apple revealed that it had a cash position in excess of $200bn+ in February, CEO Tim Cook told investors: “[We] are always looking at acquisitions. We acquired 15 to 20 companies per year for the last four years.”
He was then asked if Apple would be keen to acquire entertainment copyrights.
“In terms of original content, we have put our toe in the water with doing some original content for Apple Music, and that will be rolling out through the year,” replied Cook, adding “we’re learning a lot about the original content business and thinking about ways that we could play at it”.
Grabbing hold of a chunk of a company like Universal – with its 35%+ global market share in recorded music – wouldn’t be a bad aid to that mission.
3) Financiers, rivals and telcos?
Consider the anti-monopolistic strife Universal faced from the European Commission when acquiring EMI Music in 2012: could Sony Music Entertainment or Warner Music Group really get away with buying into recorded music’s market leader?
There is an argument that, for businesses like these, Universal’s colossal price-tag might make more strategic sense than for outsiders – with mutual cost-savings to be enjoyed.
Universal and Sony, for example, already have co-ownership of the Now That’s What I Call Music! compilation brand – which is structurally awkward, but financially rewarding for both parties.
Yet it’s difficult to see a scenario whereby Sony or Access Industries could snap up a minority stake in UMG without alerting competition regulators.
That’s not to say, though, that individuals well-known to the music business couldn’t become involved in buying a slice of Universal.
When rumors began to fly that Sony Corp might offload its music division earlier this year, one of the names bandied around as a potential buyer was Accretive LLC – run by former Warner chief Edgar Bronfman Jr (pictured).
Bronfman Jr recently showed his appetite for content acquisitions by teaming up with Blavatnik and Warner board member Ynon Kreiz in bidding for Time Inc (owner of Time, People and Sports Illustrated). The attempt eventually fell flat due to a reported ‘valuation gap’.
(Bit of trivia: once upon a time, Bronfman slated Universal’s buyout of EMI Music as a ‘terrible deal’ for the music business – having missed out on closing the acquisition himself.)
The big question mark for private equity groups without an obvious strategic interest in buying into UMG is simply one of return.
Even at the lower end of reported current bank valuations for Universal (€13bn, or $14.1bn), the company’s 2016 EBITDA (and its 12.2% margin) suggests an investor could be waiting decades to make their money back.
That won’t be appealing to venture capitalists wanting to make a quick buck.
Yet for the right partner – with the right strategic reasoning for grabbing a stake and a bullish view on future streaming growth – Universal could still provide a very tempting opportunity.
It’s not as if there isn’t eye-watering money out there in the content acquisition space, either – especially in the world of telcos and ISPs.
Don’t forget that AT&T last year agreed to pay $85bn for Time Warner – effectively a play by an internet provider to own of the sort of movies and TV shows that keep people glued to their sofas.
However, at $29.3bn, Time Warner’s 2016 revenues were roughly five times larger than those of Universal Music Group.
A fifth of $85bn works out at $17bn – suggesting that, even if a generous bidder comes to the table, Vivendi may struggle to bring UMG’s headline-grabbing new valuation to life.
