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Beatles Royalties & Family Conflicts: We Read UMG’s 300-Page Prospectus. Here’s What We Found

The Universal Music Group’s prospectus for the company’s successful listing on the Euronext Amsterdam exchange revealed plenty of tidbits of information, in addition to providing financial insights to educate investors about the global music giant and its worthiness to be included in their stock portfolios.

UMG ushered in a new era for the music business when its shares began trading on Sept. 21: record amounts of money is flowing into music, chasing recordings and compositions expected to benefit from strong streaming growth and burgeoning revenue streams from social media, gaming and fitness platforms. Investors immediately started looking at UMG’s peers: shares of Warner Music Group jumped 12.2% on Sept. 21 and has rose an additional 2.4% through midday Thursday. Now that the dust has settled, with UMG’s stock price sitting pretty at 24.72 euros – a 44.8 billion euros market capitalization — here’s a rundown of some of the more informative elements found inside the 300-page document:

The Beatles and EMI

In order to become a publicly traded, stand-alone company, Vivendi had to do an internal reorganization in 2020 to align the parameters of what would become Universal Music Group. As part of that, some of the liabilities directly assumed by Vivendi had to be transferred to UMG for the latter company to have control of all the music assets. It also had to assume the obligations and liabilities that came with them. One such Vivendi obligation that UMG had to take on was to provide security for royalty payments capped at $100 million euros to the Beatles, Yoko Ono and certain Apple entities.

But that’s not surprising considering that the ownership of EMI, acquired in 2012, was directly under Vivendi, not UMG, so they had to do some internal asset and financial maneuvering to bring EMI under the latter’s banner. UMG had to pay almost 1.2 billion euros to Vivendi to assume EMI’s ownership, which occurred through some internal debt maneuvering, according to the prospectus.

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What’s the Deal?

After two years of ramping up investment in content, it looks like UMG slowed down in the first half of 2021. But that’s likely due to the timing of what music assets are up on the trading block. In 2019, UMG paid out 192 million euros in advances and made 219 million euros in catalog investments, according to the prospectus. That escalated significantly in 2020, with advances reaching 588 million euros and catalog investments totaling 929 million euros (that includes the $300-plus million UMG paid to acquire Bob Dylan’s publishing catalog). In the first half of 2021, the company paid out 130 million euros in content advances and $43 million in catalog investments. As for the latter number, music asset traders tell Billboard that while a lot of assets have come to market, for some inexplicable reason, deals are taking much longer to get done this year. Go figure.

All In the Family

In the potential conflicts of interest section, we learn that chairman and CEO Lucian Grainge]s son, Elliot  Grainge, has generated some $30 million in revenue for UMG in the last three and a half years through his company 10K Projects, which signed rapper Tekashi 6ix9ine. That breaks out to $5.02 million in the first half of 2021; $8.975 million in 2020; $6.683 million in 2019; and $9.65 million in 2018. It’s standard practice for companies to disclose potential conflicts of interest – not likely, just potential – to their investors in financial statements.

Meanwhile, the prospectus also notes that UMG entered into a publishing administration agreement on Oct. 1, 2019, with 10K Projects for its Ten Thousand Music Publishing company. As part of that deal, UMG provided a $1 million advance and a signing fund of up to $1.5 million per year for the first four years of the contract.

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In another 10K Projects deal, dated July 3, 2019, the Elliot Grainge-led company was assigned the agreement that artist Gnar had with UMG’s Capitol Music Group. That deal provided CMG the right to recoup $564,000 from its investment in Gnar’s music.

Finally, Elliot’s company signed a distribution agreement with the then-named Caroline, now Virgin Music Artist & Label Services.

Under the agreement, Caroline is required to pay advances to 10K for costs incurred in connection with A&R, marketing, promotion and overhead.

Another conflict-of-interest item noted that UMG has entered into a worldwide publishing administration agreement with Julian Swirsky, the son of UMPG chairman and CEO Jody Gerson. Swirsky, the prospectus notes, in October 2016, which has been amended so that it is in effect until March 31, 2022 — although it also notes that some specific recordings may qualify for earlier termination or extended terms. is employed as a senior VP of A&R at Republic Records. Also, the prospectus disclosed that another son, Luke Swirsky, is an independent contractor to Republic Records, but it doesn’t provide details.

Start Me Up

In anticipation of the next wave of industry transformation, UMG and its operating companies have launched Abbey Road Red, launched in 2015; gBeta Music Tech, launched in 2018 by Capital Music Group and the Gener8tor startup accelerator; and the Accelerator Engagement Network, a network of 12 accelerator programs. Each organization is aimed at mentoring and promoting entrepreneurship music technology startups. The latter initiative “has supported the mentorship of over 120 music-technology startups that have collectively raised over US$130 million in funding.” Additionally, UMG has hosted 25 “innovation challenges” and hackathons that have resulted in more than 215 working prototypes.

That Gum You Like Is Coming Back Into Style

With its physical sales totaling $945 million in 2020 and its download sales at $413 million, those numbers show that UMG is still invested in the sales model, even though the preponderance of revenue and its future comes from streaming. In another sign that the sales model is still a factor, UMG paid out 1.1% of its 7.43 billion euros ($8.4 billion), or $82 million, in mechanical expenses to music publishers.

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Sharing Is Caring

As part of its Sept. 21 listing, Vivendi distributed 1,813,241,160 shares. But UMG is authorized to issue a total of 2.7 billion shares, which means that there is already the potential for another 887 million UMG shares to come to market. However, this allotment isn’t like a shelf registration, which allows companies to issue further shares without going through the process of issuing another prospectus. Sources suggest that any further issuance of those 887 million UMG shares would need shareholder approval.

Bonus!

The UMG prospectus says that it will pay 50% of the company’s annual net profits in dividends, twice a year; and that the board has already approved a 362.7 million euros ($420 million) payout on Oct. 28. That will be the first payout for 2021, even though the prospectus notes that on April 29, the company paid out a dividend that totaled 422 million euros ($510 million). However, that payout was for 2020.

Current vs. Catalog

On the bottom of page 53 of the prospectus it says that in 2020, catalog content accounted for 54% of UMG’s recorded music digital and physical revenue. In contrast, MRC Data says that in 2020, catalog accounted for 65% of activity. While it appears that UMG is lagging industry trends, that likely isn’t the case. First off, the MRC data cited above only covers the U.S., while UMG refers to a global percentage. Second of all, there is another factor to consider: older catalog titles are often sold at discount—who remembers the $5 CD bins at Walmart and Best Buy? Or to put it another way, the UMG percentage reflects dollars, while the MRC percentage reflects a unit count. So the lesson there might be: while catalog has a larger proportion of the marketplace when counting units, that catalog percentage might shrink when counting revenue. Got it?

Global Footprint

Besides its presence in all the usual territories where music plays well, the prospectus notes that UMG is diversifying its global presence even more aggressively, by generating new activities and key partnerships in Israel, Morocco, Vietnam, Senegal, Cameroon, Nigeria, Italy, India, Indonesia, Thailand and South Korea.

In order to have a global presence, UMG employs approximately 9,370 persons worldwide, including full- and part-time employees.

The document also laid out the average number of UMG’s 9,370 employees by region for June 30, 2021: 3,910 in Europe; 3,502 in North America; 1,438 in Asia-Pacific; 390 in Central and South America; and 130 in Africa.

Borrowing Power to Spare

As a standalone company, UMG will have direct access to capital markets to fund catalog acquisitions and acquire companies. As of June 20, 2021, UMG could assume billions of euros of additional debt. Until UMG has certain ratings by a credit ratings agency, such as Moody’s or Fitch, the company must maintain a leverage ratio no greater than 4.0 — meaning its long-term debt cannot exceed 4 times its EBITDA (earnings before interest, taxes, depreciation and amortization). Currently, UMG’s leverage ratio is about 2.0, meaning UMG could assume about 2 billion euros ($2.3 billion) of additional debt, an amount that increases as UMG’s EBITDA grows over time.

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Publicly Traded by Vivendi at Heart

UMG will have leeway to adjust to being a public company. Vitally, UMG appointed its first board of directors without outside nominations — those will inevitably come later — by later investors. Instead, two board members have long-standing ties to UMG: CEO Grainge and deputy CEO Vincent Vallejo. Two members came from the Tencent-led consortium that owns 20% of UMG’s equity and another is also on the Vivendi board. UMG has a 42% free float, meaning 58% of its shares are owned by long-term investors that will not sell their shares. That ensures UMG’s voting power will remain concentrated in UMG’s pre-spin off investors: Vivendi and the Bolloré Group, which at an 18% stake is Vivendi’s largest shareholder. However, these existing shareholders do not have a lock up period and may, however unlikely, sell their shares.