Last year, Universal Music Group acquired a 70% stake in the recorded music catalog of Thailand’s RS Group for around USD $45 million (plus a potential ~$5m in bonus payments). At the time, MBW told you to “expect more M&A activity from UMG in Asia to follow”.
Okay, that wasn’t the boldest prediction we’ll ever make. But, well, we weren’t wrong.
UMG has now confirmed that it recently completed the acquisition of the remaining 30% of RS Group’s catalog, taking full ownership of the recordings portfolio.
MBW has further confirmed that this additional transaction cost UMG approximately USD $18 million, with a potential additional bonus fee of approximately USD $2 million.
In other words, UMG just completed the acquisition of Thailand’s second-largest recordings catalog for a total sum of approximately USD $65-$70 million.
Interesting. But the bigger story here is what’s going to come next.
Speaking last Tuesday (September 17) in London at UMG’s Capital Markets Day (CMD), a handful of senior Universal execs focused on the company’s future acquisitions strategy in “high-potential” markets, where streaming monetization is predicted to explode in the years ahead.
The territories mentioned as “high-potential” included large music markets like China and India, but other markets also got their dues, including Nigeria – where UMG acquired a majority stake in Mavin Records last year – plus Vietnam, Indonesia, and Thailand.
“The M&A that we’re looking at doing strategically is in these high-growth-potential markets.”
Sir Lucian Grainge, UMG, speaking last week
At the CMD event, Sir Lucian Grainge, CEO and Chairman of UMG, described Universal’s “triple-prong” strategy in these markets in the years ahead, spanning three areas: local A&R on the ground, plus services for local entrepreneurs via Virgin Music Group and, finally, M&A.
It was explained that this M&A activity (of music companies in emerging territories) would be achieved via cash from UMG’s own balance sheet, in contrast to catalog acquisitions in established streaming markets like the US. (Those US-catalog-type deals, explained Grainge, would be executed via Chord Music, in which UMG is a minority partner alongside majority owner Dundee Partners.)
“The M&A that we’re looking at doing strategically is in these high-growth-potential markets,” confirmed Grainge, noting: “We’re talking about [relatively] small markets and small companies, but with entrepreneurs that have [to date] had the entire run of the place – and that’s where Virgin comes in.”
Boyd Muir, UMG’s EVP/CFO, expanded on this point, noting that Virgin Music Group would help UMG “bring entrepreneurs and labels in our ecosystem” within these markets “and then once they’re inside, things tend to happen; there will be opportunities to buy them over the course of time”.
“The reality is,” said Muir, “we can, over time, through M&A, increase our presence in these markets, and that we fully intend to do.”
(Grainge later quipped: “Unfortunately, I can’t buy Sony; if I could then I’d buy Warner as well!” His point: in Grainge’s eyes, one-off transformative acquisitions like that which saw UMG buy EMI Music in 2012 are now thin on the ground, but there is still plenty of smaller-sized M&A opportunity to be had in fast-growing markets that are dominated by local repertoire.)
“Through m&a [we can] increase our presence in these markets, and that we fully intend to do… [via Virgin Music Group we can] bring entrepreneurs and labels into our ecosystem… then once they’re inside, things tend to happen – there will be opportunities to buy them over the course of time.”
Boyd Muir, Universal Music Group, speaking last week
Adam Granite, EVP of Market Development, discussed Universal’s strategy in ‘high potential markets’ in more detail, revealing that UMG has just opened its fifth office in Greater China, in Shenzhen. That new locale joins UMG offices in Hong Kong, Taiwan, Beijing, and Shanghai in China, which was the world’s second-largest digital music market in 2023.
Speaking generally about ‘high potential’ markets, Granite noted: “A digital-first nature, lack of legacy systems and processes, and lower cost structure means [these markets] can be very profitable, especially when the repertoire can find audiences in higher ARPU markets.
“Given that, our investments here should remain margin-accretive for [UMG] overall.”
Granite then turned his attention to three fast-growing markets in particular, all in Southeast Asia: Indonesia, Vietnam, and Thailand. (Granite confirmed UMG’s acquisition of the remaining 30% of RS Group’s catalog in the latter territory.)
Of Indonesia, Granite said: “Indonesia is a significantly populous country with approximately 275 million people… after only really beginning to invest in 2015… [UMG is] now in the leading position in the market.”
He noted that UMG’s revenues in Indonesia had grown eightfold since that 2015 investment, with a 25-times expansion in EBITDA.
Granite then moved on to Thailand, calling it the “fastest-growing market in Southeast Asia”. Since 2018, he said, UMG had increased its market-share in the territory by 50% through “both local A&R [and] through M&A”.
He noted that UMG expects that “after only one year of integration” into Universal’s systems, the ~$70 million price paid for RS Group’s catalog will become “an effective 11.5-times of EBITDA [multiple] in a market that is growing rapidly”.
Through this and “some other deals on the horizon”, claimed Granite, UMG is now “on track to become a market leader” in Thailand.
Of Vietnam, Granite said: “We didn’t have a local release there until 2020 but today we have almost 25% of the Spotify top 200 there, being driven primarily by our local language A&R and our distribution partners.”
So how will UMG actually pay for its future M&A deals in ‘high-potential’ markets?
Boyd Muir explained at last week’s CMD event that UMG expects to convert 60% to 70% of its adjusted annual EBITDA into free cash flow, before investing activities, over the next four years.
He also confirmed that UMG has committed to paying shareholders a dividend worth 50% of its adjusted net profit each year. That’s a formula set in stone via an existing tripartite agreement between UMG and two of its largest shareholders: Vivendi/Bolloré Group plus a (two-part) Tencent-led consortium.
To give an example of what all that might mean, let’s make two quick calculations:
- In FY 2023, Universal Music Group posted an adjusted annual EBITDA of EUR €2.369 billion (USD $2.56bn). If we follow Muir’s (future-looking) formula of 60-70% of that adjusted EBITDA converting into free cash, it would leave UMG with an annual free cash pile of approximately USD $1.66 billion;
- Also in FY 2023, UMG posted an adjusted annual net profit of EUR €1.595 billion (USD $1.73bn). Bearing in mind Muir’s comments, 50% of that net profit will have been set aside for shareholder dividends – i.e. approximately USD $865 million.
Looking at these two calculations, then, it seems a fair bet that — so long as UMG’s profit doesn’t shrink in the future compared to FY 2023 — it will comfortably have multiple hundreds of millions of dollars in new free cash per year for potential M&A investments in ‘high-potential markets’.
(Again, that’s after segmenting off the required amount for dividends at 50% of adjusted net profits.)
“We’re extremely comfortable and confident that, post-dividend, post-organic growth in these [‘high-potential’] markets, we can invest, we can acquire, and we can really build a great company.”
Sir Lucian Grainge, Universal Music Group
Muir specifically tackled UMG’s willingness to spend its post-dividend cash in ‘high-potential’ markets at the CMD event last week.
He said: “We’ve got a significant commitment to pay… dividends [at 50% of adjusted net profit].
“Where we are today is that in our view, for the growth we see ahead, we really should be investing our surplus cash into the growth that’s building [with the] Virgin Music Group business [and] the high-potential markets.
“It would be remiss of us to not actually back the opportunity by [not] investing our surplus cash into that.”
Added Grainge: “We have to be realistic on what cash we need, and where we need it.
“We’re extremely comfortable and confident that, post-dividend, post-organic growth in these [‘high-potential’] markets, we can invest, we can acquire, and we can really build a great company for the next 10, 15, 20 years and beyond.”Music Business Worldwide
