On Aug. 6, Universal Music Group chairman/CEO Lucian Grainge sent a memo to staff saying parent company Vivendi had entered talks with China’s Tencent to buy a 10% stake in UMG, valuing the world’s biggest record company at $33 billion, at the low end of many Wall Street analysts’ rosy estimations.
Such a deal would be good news for other label and catalog owners, especially those looking to cash out or leverage their balance sheet: Billboard estimates UMG’s 2018 earnings before interest, taxes, depreciation and amortization at $1.165 billion, making the valuation 29.5 times multiple. But the sale could affect the industry in other ways.
If completed, Vivendi’s deal with Tencent — which owns three music streaming services in China as well as a 10% stake in Spotify through its Tencent Music division — would reverse the current dynamics between the digital services and the major labels from which they license music. While it has long been speculated that a company like Apple, YouTube or Amazon might one day buy a major, this deal would mark the first time a digital service dipped a toe in that water.
Other labels would likely be suspicious that UMG’s artists and songs would gain favored-nation status with Tencent Music’s digital services in China. At the very least, with Tencent’s streaming services claiming 81% of the country’s monthly active users, according to a Barclays report, it would likely help establish UMG as the dominant outside music provider there. “The obvious ‘strategic’ rationale seems to be that Tencent could help UMG in the Chinese music market,” said Barclays analysts Julien Roch and Emily Johnson in a report on the deal.
On the other hand, how would digital services like Amazon, Apple and YouTube treat UMG if it were owned by a competing service? There is no precedent in the digital world. But when Best Buy started its own record label in 2000, it met resistance when trying to get other retailers to stock its music titles.
According to the deal points disclosed, Tencent would have the option to buy an additional 10% of UMG at the same terms, but the Barclays analysts say “it remains unclear why they would choose to acquire a further 10% [later], if not initially.”
And since selling a piece of UMG is seen as a way for Vivendi to realize a reward for helping grow the label, it seems unlikely the sale of 20% would allow it to accomplish all of its goals. Consequently, another 30% to 40% of UMG may still be in play. Would another suitor get the same pricing? Barclays analysts believe Tencent would rule out other digital services, though others, like Liberty Media, could still be interested.