Universal Music's $8.5 Billion Bid: A Market Leader's Premium

With news that Vivendi spurned an $8.5 billion bid from SoftBank made three months ago to buy the Universal Music Group breaking after the close of Euronext Paris' trading hours, it remains to be seen if that offer will spur Vivendi’s stock price to new highs and thus put pressure on the French company to divest its music company.

SoftBank and the Vivendi board had been in discussion for nearly three months, according to sources. The board has been under pressure for some time now to break up the disparate telecoms and media conglomerate structure its former chief executive Jean Bernard Levy had championed until his ouster 13 months ago.

$8.5 Billion Universal Music Takeover by SoftBank Rejected by Vivendi

But the story for music industry insiders will be just how high the world’s number one music company is being valued at by SoftBank. Several were excited that this could represent a turnaround in the industry's fortunes, but that may not be the case; there can only ever be one market leader, with a 30%-40% market share depending on the country. There will be a market leader premium baked into the offer.

Yet, that bid multiple is much higher than most analysts’ estimates, according to the Financial Times, which broke the news, and it is certainly higher than the multiple EMI's sale realized.

Citigroup got paid a combined multiple of 7.6 times EBITDA based on when it sold the label for $1.9 billion and its publishing assets for $2.2 billion last year.

So at what kind of multiple does SoftBank value Universal Music Group? In order to figure that out, some math is in order to calculate how much UMG will realize from the EMI acquired assets.

According to its financials, EMI's recorded music operation generated 158 million pounds, or $252.6 million, in EBITDA for the year ended March 31, 2012. When UMG sold Parlophone to Warner Music Group sources said that the 487 million pound acquisition price represented a 6.2 multiple, which works out to about 78 million pounds, or $127 million. If you subtract that plus another $10 million in estimated EBITDA generated by the divestment of Sanctuary, Mute and the NOW music series, that would leave UMG with about $115 million in EBITDA from the EMI assets it now owns.

But UMG is also expected to realize 100 million euros in overhead savings, which would leave the company with an additional $131 million in EBITDA, which combined with the $115 million it is gaining from the EMI assets it acquired and added together with the 528 million euros ($693 million) in EBITDA that UMG generated itself for the year ended Dec. 31, 2012, Billboard estimates UMG's annualized EBITDA at about $940 million.

At the $8.5 billion pricing SoftBank offered, that gives UMG about a 9X multiple, which is a significant improvement over the 7.6 multiple that Citigroup realized through the sale of EMI. You could argue that a Universal Music sale price would include the added premium of being No.1 at a time of industry transition when market share could dictate the future of media and technology partnerships.

On the deal front, given that Vivendi would have realized a significant premium over the price that EMI traded at, shareholders will likely want to know how they could turn down that deal's valuation. Vivendi has indicated privately that it has not entertained selling Universal Music, which is all-dominant in the music business. And if the bid had inched up by another $500 million to $1 billion the talks might have gone further.

But Vivendi will undoubtedly point out that UMG is a much healthier operation than EMI, which had to operate under severe financial restrictions imposed on it by Terra Firma. Consequently, Vivendi will likely argue that an ailing EMI sold at a discount and that the SoftBank offer doesn't properly value the industry leader, UMG.

As it is, Vivendi has other priorities, including the potential sale of its Maroc Telecom asset at a similar price of around $8 billion. If that sale falls through the board, under pressure from the activist shareholders like Vincent Bollore, will pivot quickly back to a potential Universal Music sale.