French conglomerate Vivendi announced on Aug. 6 that it is in “preliminary negotiations” with Chinese technology giant Tencent to sell 10% of Universal Music Group. The deal would value UMG at 30 billion euros ($33 billion), a confirmation that industry growth, driven by Spotify, Apple Music and other subscription services, has boosted the value of music after years of decline.
Judging from an all-staff memo by UMG CEO Lucian Grainge, the company is already looking ahead. “The possibilities to accelerate and broaden our strategy are exciting,” Grainge wrote. A deal could be a win-win: UMG would get a partner in China, while Tencent’s products, from streaming music to video games, could more effectively use UMG’s music.
If the sale goes through, another 30%-40% of UMG could still be available. (Tencent has an option to buy another 10%.) On the day of the announcement, David Marcus of Evermore Global Advisors, a Vivendi shareholder, tweeted that Tencent is “a great partner” to reach Asia, “although we would not be surprised to see others come into the bidding.” Vivendi could also find a private equity bidder to wait for a UMG spinoff and subsequent public stock offering. Or it could seek another strategic investor.
The price of Tencent’s investment surprised some, however. A $33 billion valuation is a lofty 32 times earnings before interest, taxes, depreciation and amortization. The multiple is not outlandish for a high-growth company in an exciting market, and stocks are currently expensive by historical measures. But share prices are starting to take into account future risks for the economy, including the U.S.-China trade conflict, China’s 27-year-low quarterly growth rate and slowing growth elsewhere.
Investors may also believe $33 billion is too high. In the past nine months, UMG has been valued at $40 billion by Vivendi CEO Arnaud de Puyfontaine and $42 billion and $50 billion by analysts at Morgan Stanley and JPMorgan, respectively. But since Aug. 6, Vivendi’s peak share price has given the whole company a market value of about $37 billion, which doesn’t jibe with the valuation the Tencent transaction gives UMG. The remainder of Vivendi would have to be worth just $4 billion, even though it generates one-third of Vivendi’s earnings. Current investors could think Tencent is getting a good deal and are underestimating Vivendi. Or they accurately value Vivendi, which puts UMG’s standalone value at well under $33 billion. Either way, a Tencent deal would give the market a reference point for the future.