Currently, "there's a lot of money chasing very few deals," says another music-business veteran. Deep-pocketed investors outside the industry are salivating to get in while there's still an upside, having watched a handful of other big music bets blossom in recent years. Warner Music Group's unit, Warner/Chappell Music, for example, is now worth about as much as all of WMG was when Len Blavatnik bought it in 2011 for $3.3 billion, sources say, while Sony's purchase in 2018 of an additional 60 percent stake in EMI -- in a deal valuing the publishing unit at $4.75 billion, more than double its 2012 purchase price -- has fattened the wallets of investors including Blackstone and the United Arab Emirates' Mubadala.
Sovereign wealth funds such as Mubadala might also be interested in buying a minority stake in UMG without gaining full control, while Japan's SoftBank operates with a similar war chest and in 2013 unsuccessfully offered over $8 billion to buy UMG, sources say. Analysts today estimate UMG's value between €20 billion and €25 billion.
Other potential investors for UMG include China's Tencent, which operates its own streaming services, for which it has been exploring an initial public offering. Rival Alibaba, meanwhile, might be interested in a UMG deal in order to compete with Tencent, according to sources. These Chinese companies could act more as strategic partners to UMG than would Western digital distributors: While Spotify is still losing money, Tencent Music is profitable, in part because it already owns the rights to much of the Chinese repertoire that it plays, so it doesn't have to spend the bulk of its revenue on licensing, as Spotify does. Tencent can also offer its users additional perks like the ability to use music in their text messages, something that U.S. fans still can't do.
Tech giants like Apple are unlikely to shell out so much money for a minority stake in one label, sources say, but Hollywood film studios might: UMG chairman/CEO Lucian Grainge joined the DreamWorks board of directors in 2013 and is now a director at Lionsgate.
Vivendi is putting UMG on the market at a time when both buyers and sellers of music rights stand to profit, with most analysts forecasting the industry to continue growing briskly at least for the next one to two years as more consumers sign up for streaming subscriptions.
But it's not clear for how long such deals will be attractive: Volatility looms for the music business when streaming's growth inevitably slows down. Once everyone likely to subscribe has done so around the world, the fight for market share will intensify.
UMG is particularly well-poised for a partial sale. On a recent earnings call, Vivendi CEO Arnaud de Puyfontaine said that the timing "could not be better with respect to our competitive performance," pointing out that according to Nielsen Music's midyear 2018 report on the U.S. market, UMG represented eight of the top 10 artists, including all of the top five, plus the top eight acts ranked by on-demand audio streams. "No company has ever achieved this level of success," he told investors, making clear that Grainge and his management team would be a selling point, and would remain in control. At the half year, UMG's revenue was up 6.8 percent, primarily driven by streaming and subscription, which is up over 34 percent.
UMG also announced in July an expansive deal with The Rolling Stones, covering the band's iconic recorded music and audiovisual catalogs, archival support, global merchandising and brand -management. The deal highlights the value of modern record companies in a world where artists can sign direct licensing deals with streaming services, since The Rolling Stones could have commanded essentially a "blank check" from any other entity, says a label executive. Sources say that major labels are also paying far bigger advances to new artists than Spotify has been offering acts and managers for direct deals -- upfront investment that's still crucial for emerging talent.
But Citi analyst Thomas A. Singlehurst, who co-authored an extensive music industry report published on Aug. 7, warns that his team expects "the record labels to take a diminishing share of industry revenue over time."
"When you look at what they provide in the here and now, it's really difficult to see why they should continue to have as prominent a role as they did in the past," Singlehurst tells Billboard. "Let's look at the different components: access to recording studios and recording equipment. You don't need that; you can do it yourself. The access to manufacturing, physical distribution and warehouses: The record labels don't own that anymore, and even if they did, you wouldn't necessarily need it because of online modes of distribution. And then marketing and PR are also functions that can be done outside of a traditional record-label construct. Our point was not that these roles aren't important, just that, do you need to go to a major company to do it?"
Singlehurst adds that by putting UMG up for sale, Vivendi has signaled that "they think they can get a good price, which tells you, based on the current economy, it's worth more to someone else than it is to them. Secondly, they're very specific about saying they need a strategic partner, which also speaks to the fact that they're obviously in need of some support in some way."
But it's possible Vivendi won't sell at all, if it can't get a rich enough bid. "There are lots of players who might like to own UMG," says Singlehurst, "but I can't think of a single one who has to own UMG. There's not a company sitting there going, 'You know what, my business is going to fail if I don't own this.'"
This article originally appeared in the Aug. 11 issue of Billboard.