Is Universal Music Group's $22 Billion Valuation Too High?
'That valuation should be taken with a grain of salt and a shot of tequila,' said one investment banker.
While Vivendi is touting its Universal Music Group company as having a valuation between 13.5 billion and 20 billion euros (roughly between $14.7 bil.-$21.8 bil), some investment bankers and financial analysts are wondering if the company could actually achieve the higher valuation in a divestment sale or a stock offering.
At the Vivendi annual shareholders meeting in Paris yesterday, Vivendi general counsel Frederic Crepin told those gathered that investment bankers estimated that if the company were to float an initial public offering (stock sale) for UMG, it could carry a valuation of up to 20 billion euros ($21.8 billion), according to Reuters.
He also noted that in 2013, Vivendi received an offer of 6.5 billion euros ($7.1 billion, according to oanda.com) for UMG in 2013, which reports at the time said was from Softbank; and in 2015 received another offer of more than double at 13.5 billion euros ($14.7 billion), which Reuters sources said was Liberty Media.
Some see those statements as an attempt to boost Vivendi share price, which closed at 18.92 euros ($20.60) today, up from 18.67 Euros ($20.33) yesterday, which was up from the previous day close of 18.25 Euros ($19.88) on the Euronext Paris Exchange, according to Bloomberg.
Indeed, the 20 billion euros claim is viewed as far fetched by financial executives contacted by Billboard, who would only speak anonymously, but concede that the 13.5 billion euros valuation may be in the ballpark, even if its still too high.
Record labels, even majors that own publishing, usually trade on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) usually the preceding three year average, measured against projected EBITDA for the next year or two.
When Citcgroup sold EMI, it got paid a combined multiple of 7.6 times EBITDA for its record label and music publishing divisions that were sold in separate deals of $2.2 billion for EMI Music Publishing and $1.9 billion for the recorded music division, according to numbers in a 2013 Billboard story on Softbank’s offer for UMG.
When Len Blavatnik’s Access Industries acquired the Warner Music Group in 2011, he paid $3.3 billion, which implies a 9.6 EBITDA multiple, based on the preceding three year average from 2009-2011 of $345 million.
One investment banker speculates that UMG would carry a higher valuation than either EMI or WMG traded on when they were sold; after all streaming is driving growth for the overall industry. He guesses that the sky-high number might be a 12 times EBITDA multiple.
With the Universal Music Group having a three-year EBITDA average of 745 million euros ($811 million), that multiples out at 12 times to 8.01 billion euros ($8.7 billion), which is far short of the 20 billion euros or even the 13.5 billion euros. The 20 billion euro valuation translates into a 26.8 times EBITDA valuation; and the 13.5 billion euro valuation comes out to an 18.1 times EBITDA valuation respectively.
The 20 billion valuation is “clearly a lot of nonsense,” says one equity analyst familiar with the company “That must be an estimate from an investment bank angling for underwriting an IPO (initial public offering). Or the company (Vivendi) is just trying to prop up the chair price.”
An investment banker’s reaction to the 20 billion euros evaluation was similarly one of disbelief. “That valuation speaks to pride of ownership,” that executive says. “When I see the trade clear the tape, I will believe it. Clearly, that valuation should be taken with a grain of salt and a shot of tequila.”
He adds that when you see higher than expected valuations being thrown around, you need to ‘step back and ask yourself what is the purpose of these statements.”
Like the analyst, the banker believes says that the 20 billion euros valuation is coming from an investment banker trying to drum up business for his firm. Or revealing it is an attempt by the company itself to stoke its share price.
The 13.5 billion euros valuation is more realistic, if still considered high. “That offer was likely (by an investment banker for the suitor) made as a way to get Vivendi’s attention so they could open up a dialogue,” says the investment banker. Again, he doubts that UMG could trade on that number.
While Vivendi no longer breaks out Universal Music Publishing Group’s EBITDA, it still publishes its revenue, which averages out to 796.5 billion euros ($867.4 million) over the last three years. If UMPG had a Billboard estimated net publisher share, also known as gross profit, of 43%, that would come out to 342 million euros ($372 million).
(Publishers traditionally get 50% of revenue in straight publishing deals; and now a days for bigger songwriters 60%-75% in co-publishing deals; and 10%-15% in administration deals for superstar writers; 43% is intended as a blended rate,)
Traditional valuations of music publishing assets nowadays are 12 times NPS; although with trophy properties and if synergies are involved, it might go as high as 14 times NPS, sources say. Under those scenarios and using the 342 million euros number from above, that implies a UMPG valuation of 4.1 billion euros ($4.47 billion) to 4.8 billion euros ($5.23 billion). Let’s go with the high side of 4.8 billion euros.
Then, subtracting a Billboard estimated Universal Music Publishing’s average EBITDA of 211 million euros ($230 million), from the UMG overall EBITDA average of 745 million euros, leaves average EBITDA of 534 million euros ($581.6 million) for the rest of the company. Give that a 12 times multiple EBITDA multiple and you get to 6.41 billion euros ($7 billion) for the recorded music and merchandising operations.
So adding the valuation for publishing of 4.8 billion euros and the valuation of 6.41 billion Euros for the rest of UMG together, brings an overall company valuation of 11.21 billion euros ($12.22 billion), which, according to press reports is in the ball park of the UMG average valuation of 12 billion euros ($13.07 billion) by the analysts that follow the company.
However, it should be noted that the valuation is based on what's traditionally happened in the music industry which doesn’t necessarily take into consideration that streaming appears to be driving growth once again at a fast rate, which likely will improve valuations.
It also doesn’t take into account that music publishing feels it has been shortchanged by mandated streaming rates and is making a concerted effort to improve their payout, which would also drive valuations.
And finally, if someone from outside the business decides it wants to be the dominant force in the music industry, the only way it can get to 35%-40% market share is buying UMG and that type of dominance might require paying a premium.
UMG declined to comment for this story.