The question of what UMG is really worth will only be answered starting Sept. 21, when its shares begin to trade on the Euronext Amsterdam exchange. (Vivendi will distribute 60% of UMG’s equity to current shareholders and keep the 10% that remains after the Tencent and Pershing Square sales.) Analysts’ average valuation was $47.5 billion, and most exceeded $45 billion. JP Morgan, which valued UMG at $62 billion, called the company “one of the best assets in the European market” and predicted that its estimate — higher by far than all but BofA Securities’ $59.1 billion — “will ultimately prove conservative.”
Analysts arrive at corporate valuations by applying a multiple to a company’s forecasted earnings before interest, taxes, depreciation and amortization (EBITDA) that reflects its potential for future profit. (In this case, analysts calculated valuations using their forecasts of UMG’s 2022 EBITDA.) The more growth that analysts expect, the higher that multiple. So while a utility company like Edison International trades at 13.4 times EBITDA, fast-growing technology startup Roku has a multiple of 138.
Analysts give UMG multiples of between 19.1 (Citi) and 28.7 (JP Morgan), with most coming at about 24 or so. That reflects common forecasts of about 10% annual growth for the company. That’s why the multiple that the market ultimately gives UMG will not only reflect how investors see that organization — it will also affect the value of other businesses in the sector. If shares rise and remain high, that could convince investors that recorded-music catalogs and publishing rights are actually underpriced. If UMG stock disappoints — which seems unlikely, given analyst sentiment — investors might reconsider whether music rights and public companies that own them are worth the historically high prices they’ve been trading for recently. The stock that will be most affected is that of Warner Music Group, and it could fall — or, more likely, rise — based on UMG’s performance.
The multiple at which UMG trades will ultimately depend on two factors. One is the growth potential of music rights — mostly for recordings, which bring in about five times as much revenue as publishing rights for the company. The other is how much of a premium, if any, investors will be willing to pay for UMG over WMG, the other publicly traded major label. (Sony Music is owned by Sony Corp., which is public but includes a variety of other businesses.) In many sectors, investors are willing to pay a higher multiple for a company with more market share, with the idea that it has more negotiating leverage or other competitive advantages.
WMG, which went public in 2020, is currently valued at roughly $23.8 billion, a 21.6 multiple of analysts’ forecast for 2022 EBITDA and 621% above the $3.3 billion that Access Industries paid for it in 2011. The company benefits from steady growth, improving margins and strategic investments in, among others, gaming giant Roblox and NFT pioneer Dapper Labs. Some analysts assign UMG a premium, however, although the amount varies: Alliance Bernstein gives WMG a multiple of 18.8, lower than where it currently trades, and UMG 20.7, while JP Morgan gives WMG 22 and UMG 28.7.
The explanations as to why UMG might command a premium vary, but it has better margins and is growing faster. It also has more of the most successful artists: 17 of the top 20 in the United States for the year ending Sept. 13, according to MRC Data. “That allows you to extract a higher royalty rate and ‘nonallocable’ income” from online platforms, says Jason Peterson, chairman of music technology and distribution company GoDigital Media Group. Morgan Stanley, which gives UMG a 15% to 20% premium over WMG, says the company is “the most important negotiation” for digital services, while Pershing Square and Alliance Bernstein think its market share gives it a negotiating advantage with companies like TikTok and Peloton. That advantage could be worldwide: The fact that Tencent owns 20% of UMG could boost the company in China, “a very unique place to operate a business,” according to another executive.
Amid all the speculation about UMG’s value, the company’s results have been strong: In late July, it announced second-quarter results, with revenue of $2.37 billion, up 23% from the prior year. (First-half revenue — a better basis for comparison, given that the pandemic began in the second quarter of 2020 — grew 11% to $4.52 billion.) Several analysts increased their valuations as a result. And despite concerns about a bubble, music-asset prices keep climbing.
However UMG ultimately fares, its spinoff marks the beginning of a new chapter for the music business. The last time two major labels were publicly traded — WMG and EMI Music, in the mid-2000s — cratering revenue had investors speculating about how low they could go or what entities could take them private in order to restructure them. Now, 15 years later, it seems the sky’s the limit.