WHAT: Three months ago, Softbank, a Japanese Internet and telecommunications company, offered to buy Universal Music Group from Vivendi for $8.5 billion and was turned down, even though the valuation exceeded analysts’ expectations by $1 billion-$2 billion, it was revealed last week. The Softbank offer also surpassed the 7.6 times price of earnings before interest, taxes, depreciation and amortization that Citigroup realized through the separate sales of EMI Music Publishing and EMI recorded-music operations. With the $8.5 billion bid and UMG’s estimated EBITDA to hit about $940 million on an annualized basis, that represents a nine-times multiple.
?WHY: Vivendi turned it down, even though legions of shareholders think the company should divest its entertainment assets. Sanford C. Bernstein analyst Claudio Aspesi, who agrees that Vivendi should unload its media assets, reports that the company’s share price only appreciated 2% on July 19, the day after the deal was disclosed in a news report. If the bid had become known before it was turned down, Aspesi suggests that the stock price would have appreciated by 20%. But sources in the Vivendi camp argue that its valuation should carry a premium to reflect its stature as the industry’s market-share king. Further, they suggest that EMI traded at a discounted rate because strict financial restrictions imposed upon it by former owner Terra Firma left the company limping along. ?
WHO: Softbank is involved in all aspects of the Internet and telecommunications, both areas where content is important and becoming more vital. If it had captured a major music company, it could try to realize the hardware-content synergies that Sony Corp. did from 1988-1998 after it bought CBS Records by pushing new formats like the MiniDisc, before it started to lose its way as Internet piracy began to hurt. Softbank just completed a $21.5 billion acquisition of distant No.3 U.S. wireless operator Sprint. Owning music assets could help differentiate its phone offerings in an increasingly commoditized and competitive business. Meanwhile, Vivendi just sold its 53% stake in Maroc Telecom for $5.5 billion as it focuses on being a media and entertainment company. Without UMG as the anchor company, that strategy falls apart.?
IF: If music companies can achieve these kinds of multiples, will Wall Street, investors, private equity and venture capital come flocking back and start investing in the music industry again? Perhaps. The rest of the music business shouldn’t rush to think this is a definite sign the good times are back. UMG, with its 35%-plus market share in many territories, is a unique asset with a powerful role in the future of the wider entertainment business.