Record Labels

Pershing Square Acquires 7.1% of Universal Music Group at Possible Bargain

William Ackman
Bryan Bedder/Getty Images for The New York Times

Bill Ackman poses backstage at The New York Times DealBook Conference at Jazz at Lincoln Center on November 10, 2016 in New York City.

Pershing Square Holdings fulfilled its plans on Tuesday (Aug. 10) to acquire a stake in Universal Music Group ahead of Vivendi’s spin off on Sept. 21. The high-profile hedge fund led by Bill Ackman paid about $21.78 per share and $2.8 billion in total for 7.1% of UMG’s equity. The deal values UMG at 33 billion euros ($38.7 billion) equity value, putting the enterprise value at roughly 35 billion euros ($45.7 billion) to 37 billion euros ($43.4 billion). PSH and its affiliates have the right to acquire another 2.9% of UMG’s ordinary shares by Sept. 9.

Tuesday’s announcement came three weeks after Pershing Square’s special purpose acquisition company (SPAC), Pershing Square Tontine Holdings, dropped its plans to buy a 10% stake in UMG in a complicated deal at a 35 billion euros ($41 billion) valuation. After PSTH investors lost interest, driving down the share price, and the Securities and Exchange Commission objected, according to Ackman, PSTH changed course. As an alternative, Ackman said the PSH hedge fund would step in and buy between 5% and 10% of UMG’s ordinary shares.

UMG’s latest earnings help explain Ackman’s affection for the company: Revenues increased 19.6% year over year to 1.65 billion euros ($2.4 billion) and recorded music streaming revenue, the engine of the company’s long-term growth, rose 23.8% to 1.12 billion euros ($1.35 billion).

“There’s no business I have more confidence in the long-term trajectory of than this company — or the music industry in general,” Ackman told Billboard in July. “Piracy almost killed this business and streaming has made it better than it was with CDs and records in the '90s.”

Ackman could be getting a bargain as UMG’s equity is arguably worth far more than 33 billion euros, according to a dozen analysts who cover Vivendi. Taking into account UMG’s net debt, the 33 billion euros equity value puts UMG’s enterprise value at about 35 billion euros. With UMG’s stakes in Spotify, Tencent and Vevo, as valued by analysts, the enterprise value climbs to roughly 37 billion euros. The 12 reports examined by Billboard have an average valuation of 40.2 billion euros. UMG could be worth far more: In a July 29 report following UMG’s strong second-quarter earnings, J.P. Morgan analysts predicted that its $62 million valuation -- the highest of the dozen analyst valuations -- “will ultimately prove conservative.”

To take advantage of a hot music industry and revived investor interest, Vivendi will spin off 60% of UMG through a listing on the Euronext Amsterdam exchange on Sept. 21. A Tencent-led consortium acquired 20% of UMG’s ordinary shares bought at a 30 billion euros valuation established in December 2019. Vivendi will retain 10% of UMG’s ordinary shares.

PSH’s original plan was to use $4 billion of the SPAC’s $5.4 billion to purchase a 10% stake in UMG. The remaining money would be set aside in a new, second SPAC, and PSTH shareholders would receive warrants that entitled them to buy into a future PSH transaction. Ackman promised investors “a company that will survive and thrive” with double-digit growth, an independent board, a dominant market position and a leader in Lucian Grainge he compares to “iconic CEOs” such as Walt Disney and Steve Jobs.

After ditching its original plan, PSH reassured its investors that UMG is a worthy investment. “Pershing Square intends to be a long-term UMG shareholder,” Ackman wrote in a July 19 letter to investors, “and will endeavor to work with UMG management to help create value for all stakeholders.”