Tencent’s investment in Universal Music Group is further proof the music business is back in business. The deal, announced on the last day of 2019, will give Tencent a 10% share of Universal for €3 billion (US$3.36 billion), valuing Universal Music Group at €30 billion (US$33.6 billion). Tencent, a majority owner of streaming company Tencent Music Entertainment, and unnamed “certain global financial investors” have an option to buy an additional 10% at the same valuation.
The message to the music and investor communities is clear: music assets command a premium over their prices just a few years ago. At a reasonable estimate for full year 2019 revenue and EBITDA — each increasing 20% from 2018 — the Tencent deal’s €30 billion valuation is 26.4 times earnings before interest, taxes, depreciation and amortization. (The multiple represents the price a buyer pays for each dollar of a company’s earnings. Debt and taxes are excluded because they are unique to the acquisition target and can change after the purchase. Depreciation and amortization are excluded because they are non-cash expenses that write down the value of physical and intangible assets.) The deal will be completed in the first half of 2020. When the deal was announced in August 2019, the €30 billion valuation was 33 times 2018 EBITDA.
The 30 billion euro valuation sets a favorable precedent for future deal-making. Investors might pay a premium for Universal’s top global market share in recorded music — 37% in 2018, according to the IFPI — and second-largest share of the music publishing business behind Sony/ATV Music Publishing. And the Tencent investment creates a strategic partnership that will give Universal an advantage over its peers in China. But Sony and the other major music company, Warner Music Group, and BMG, the largest independent label and publishing company, could argue they should command a similar EBITDA multiple. Each company will benefit from the same growth in streaming revenue that influenced Universal’s valuation.
Growing expectations for industry growth pushed valuations higher. In 2017, Goldman Sachs forecast global recorded music revenues would hit $41 billion by 2030 and put a $23.5 billion value on Universal. The same year, Vivendi, Universal’s owner, announced it believed UMG was worth €13.5 to €20 billion euros (roughly US$14.7 to US$21.8 billion at the time). These numbers weren’t met with widespread agreement. “That valuation should be taken with a grain of salt and a shot of tequila,” said one investment banker of Vivendi’s number. But in 2019, Goldman Sachs upped its 2030 global forecast to $45 billion, more than twice the $19.1 billion of global revenues in 2018. By the end of the year, Tencent’s investment cemented a €30 billion (US$ 33.6 billion) value for Universal.
Universal’s relatively high 26.4 times EBITDA multiple is influenced by strong growth in global revenues. Previous acquisitions, made when the industry was in decline, were cheap in comparison. Warner was acquired by Access Industries in 2011 at an 8.4 multiple. Two years later, Warner bought Parlophone Records at a 7.5 EBITDA multiple. Private equity firm Terra Firma paid 18.5 times EBITDA for EMI in 2007 — high at the time for an entire company during a market downturn. After Terra Firma defaulted on its debt to Citi, Universal picked up EMI Records at 9.4 times EBITDA in 2012. After European regulators required Universal to sell some assets to reduce its market power, Warner’s winning bid for Parlophone Records cost 7.4 times EBITDA.