Universal Music: How Much is the World’s Biggest Label Worth?

Analysts and industry executives were confused when Vivendi rejected SoftBank’s offer to acquire Universal Music Group for $ 8.5 billion in 2013.

french group refuse It was $ 2 billion to $ 3 billion higher than analysts’ universal rating. Hit by piracy caused by the advent of the Internet, music revenues have been declining every year for more than a decade, without any turnaround.

Eight years later, the bet against the current of Vivendi and its controlling shareholder Vincent Bolloré in France promises to be spectacular.

On Tuesday, the group will sell 60% of Universal and will be listed on the Euronext Amsterdam stock exchange. The prospectus gives Universal an indicator of 33 billion euros, but analysts believe it is far more valuable – JP Morgan puts it at 54 billion euros.

Each Vivendi shareholder will acquire one share of a new independent company. The Borole Group holds 18% and Vivendi 10%.

There is no official lockout for major shareholders, but Vivendi has pledged not to sell its shares for two years, and analysts expect a period of stability.

The music industry has made a dramatic comeback since streaming services began pouring billions of dollars into the world’s largest copyrighted companies, Universal Music, Sony Music, and Warner Music. ..

Their owners are attentive. Leonardo Bravatonic, the billionaire Warner Music’s majority shareholder, listed his third-largest music company last year. His net worth jumped $ 7.5 billion First day of trading, Bloomberg believes.

Bolloré and Vivendi are also raising funds. Vivendi has sold a third of Universal for around 9 billion euros since 2019, first selling 20% ​​to a consortium led by Tencent for a valuation of 30 billion euros. 2019 And will be sold in 2020 10% of the capital Bill Ackman’s Pursing Square hedge fund in 2021 with a valuation of 35 billion euros.

Trade has also changed wealth Lucian Grainge, CEO of Universal. He will receive 17 million euros in negotiations for the Tencent transaction and a 150 million dollar listing bonus.

Obviously for these transactions. Sales of recorded music hit a low of $ 14 billion in 2014 and accelerate to $ 21 billion in 2020, according to data from the International Federation of the Phonographic Industry (IFPI). Streaming accounts for the majority of its revenues, growing 20% ​​year on year to reach $ 13.4 billion in 2020.

Global sales are still below their 1999 peak, but investors are beginning to forget the days of Napster and iTunes, when piracy was rampant and CD sales were down.

However, the valuations of the three major groups of labels did not really change the prices according to this growth. Universal Music and Sony Music are part of large French and Japanese conglomerates, and Warner Music was personally managed by Access Industries of Bravatonic. Investors could not easily bet on the renaissance of music.

Spotify 2018 stock market listing I changed that, but the Swedish company sells music subscriptions, not the music itself. Public offerings for two of the three major tag groups give you a clearer picture of how the industry is progressing.

“The large catalog of master recordings has not changed. [since EMI in 2012]“A senior music executive said. “I didn’t have the option to reset the value based on where the streaming took place.”

Investors dance when the music plays

Wall Street analysts are salivating across Universal. JPMorgan called the company a “special asset” and predicted that the valuation of 54 billion euros “would prove prudent”. UBS focused on Universal’s “irreplaceable” catalog and valued it at 45 billion euros. Bank of America values ​​Universal at 50 billion euros. This is a 30% premium for Warner Music.

The euphoria rests on a simple premise. As more and more people pay for streaming to apps like Spotify, the value of their music rights increases. And Universal is the world’s largest music rights holder.

According to IFPI, the Californian group dominated 36% of the recorded music market in 2020. The list includes The Beatles, Kendrick Lamar, Taylor Swift and Olivia Rodrigo. The 10 best-selling artists of the last year have all signed Universal.

Universal is the world’s largest music rights owner and has artists such as Taylor Swift © Chris Pizzello / Invision / AP

Record companies currently make money primarily by collecting royalties from technology companies. Spotify and Apple Music pay music rights owners more than two-thirds of the $ 1 they earn. In recent years, Universal has also dealt with social media apps such as TikTok and Facebook, and fitness groups such as Peloton, which pay to use songs on the platform.

This model is more profitable than in the era of the CD because Universal no longer has to spend money on logistics. The rate of return fell from 16% in 2018 to 20% in 2020. As a result, annual profits are expected to increase to “late single digits” and profit margins before interest, taxes and depreciation are expected to increase to ” average -20s “. Year.

Music officials also argue that streaming makes earnings more predictable and less dependent on the rating of hit albums.

“Music is now a utility … Everyone is happy to pay $ 10 a month,” said the boss of Mercuriadis. Acquisition of the Hipgnosis Songs fund He’s devouring song catalogs in recent years at rock-bottom prices. “I think Universal will be a $ 100 billion company with very short orders,” he added.

However, according to JP Morgan, per capita music spending is below its peak in the United States. Per capita music income recorded in 1999 was $ 81 on an inflation-adjusted basis, well above $ 37 last year.

Almost half of Universal’s recorded music revenue comes from less than three years of music. In short, we must continue to invest to find new talent.

Universal’s revenue grew from € 6 billion in 2018 to € 7.4 billion in 2020. However, it also spent € 2.5 billion on catalog acquisition and artist progression. , including the resignation of stars such as Taylor Swift and the purchase of over $ 300 million. Bob Dylan’s Songwriting Catalog.

Is your streaming dream sour?

The big question is why the breeds we are listing now. Skeptics admit these deals have peaked in terms of valuation, and music owners want investor enthusiasm to monetize before they come out of the putters.

Guy Hands, a private equity executive behind the disastrous acquisition of EMI in the late 2000s, praised Universal’s turnaround, adding: Anyone in the know will certainly reduce their exposure. ”

Some analysts warn of the risks to Universal’s future growth as emerging markets become a bigger driver of the streaming market.

As more established streaming markets such as Sweden have reached saturation, music companies are pushing for new subscriptions in India, China and other populous low- and middle-income countries. China is the world’s seventh largest music market by revenue, but analysts predict China will be in the top five, and possibly in the top three. However, subscribers pay significantly less to stream in these regions, which reduces the average revenue per user.

These markets are centered on local conduct. Universal has invested in the development of undulating talent. Impressive joint venture For example, in China there is Tencent. But “betting on China is a dangerous proposition,” warned Bill Welde, a former Billboard editor who currently oversees music programs at Syracuse University.

“Everything that is currently being sold to potential investors in the music industry is a belief in the global future of music streaming,” he said. “It’s not completely wrong, but it’s more boring than most people think.”

There is also the lingering fear that the internet will push more artists to bypass record companies. The share of Spotify streams captured by Merlin, the leading group of dominant and independent labels, increased from 87% in 2017 to 78% in 2020.

For now, Wall Street has allayed that concern. A Societe Generale analyst said:

When asked by The Financial Times if the music market had peaked in this cycle, Grainge understandably dismissed the concept. He claimed the company was making money from new sources such as video games, fitness apps and social media companies.

“I have had two recessions and two recessions. I know what’s wrong, ”he said. “We are opening up new areas of monetization that were previously unpredictable.”

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