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Universal Music Group Posts Strong Third Quarter as Sale Talks Heat Up

Universal Music Group posted solid earnings in the third quarter of this year, with revenue up 13.5% from the same period in 2017, but attention focused on parent company Vivendi’s impending sale of up to 50% of the unit. Before Vivendi’s earnings report discussed UMG’s earnings, it reported that it has chosen “about” 15 banks for the bank selection process, and suggests that a deal could take place as soon as early next year.

“Following the preliminary work carried out by the Management Board, about fifteen banks were chosen for the bank selection process,” the document reads. “The banks could help Vivendi identify one or more strategic partners for its subsidiary Universal Music Group. Vivendi will hold working sessions with these banks before the end of fall to determine their qualifications and discuss the potential terms of engagement and fees. The end goal of these working sessions is to select and retain five to seven banks that will be charged with finding the best partners for UMG. Universal Music Group’s 2018 financial results, which will be published on February 14, 2019, will serve as a basis for the discussions with potential partners. The cash from this sale may be used for a significant share repurchase program through a tender offer and for potential acquisitions.”

Unlike Sony and Warner, the other two major music groups, or the independent label collective Merlin, the Lucian Grainge-helmed UMG has not yet sold any of its shares in Spotify, in which it holds a 3.5% share. Sony, which held a 5.7% share, sold 50% of its stock shortly after Spotify went public in April, reaping some $750 million in profit.  While holding off on selling Spotify stock is presumably intended to sweeten the UMG pot, the move may not work in the company’s favor: investors have cooled on Spotify as the stock market has receded, and the streaming company has lost an estimated $8.5 billion in value in recent weeks, dropping from a late-July peak valuation of more than $35 billion to around $24.5 billion today.

Liberty Media is among the interested parties, CEO Greg Maffei said Wednesday during the company’s annual investor meeting, according to Music Business Worldwide. Asked whether the company was interested in partnering with UMG, Maffei began with a caveat, saying, “It’s a little odd, a little different, in the music space, While some of the labels have had a taste or touches [of ownership] into a piece of Spotify, there really hasn’t been that same crossover [as in other industries], where a distributor or a content provider has owned an ongoing large piece of the other side. I think that’s probably a missed opportunity in some ways, for both [music content owners and music distributors].”

But he then said, “Start with the premise that if there’s anything that comes up in music, we likely look [at it]. We’re as big a force, we have as much cash flow, as anybody in the music business. We will look at everything.

“Will we look at UMG if presented [with the opportunity]? Absolutely. In principle – and we have to be opportunistic and look at the realities of the deal – does [buying some of UMG] potentially make some sense, to own a part of the content infrastructure as a way to hedge [royalty costs]? Absolutely.”

With that as a broader context, according to the report UMG’s third-quarter 2018 revenues amounted to €1,495 million ($1.695 million), up 13.5% at constant currency and perimeter compared to the third quarter of 2017 (up 13.3% on an actual basis). For the first nine months of 2018, UMG’s revenues amounted to €4,123 million ($4.673 million), up 9.1% at constant currency and perimeter compared to the same period of 2017 (up 3.5% on an actual basis).

Recorded music revenues grew by 10.2% at constant currency and perimeter as growth in subscription and streaming revenues (up 35.8%) more than offset the continued decline in both download (down 24.6%) and physical (down 16.3%) sales. The unit’s top sellers included albums from Drake, Post Malone, XXXTentacion and Migos, as well as the Kendrick Lamar-helmed “Black Panther” soundtrack.

Music publishing revenues grew by 10.6% at constant currency and perimeter, also driven by increased subscription and streaming revenues, as well as higher revenues generated from performance rights and synchronization.

Merchandising and other revenues were down 13.4% at constant currency and perimeter, due to lower touring and retail activity.

The report notes that UMG songs occupied the No. 1 spot on the Spotify Global Chart for 37 out of the first 39 weeks of 2018, and for the last week of September 2018. It also had nine out of the Top 10 Albums on the Billboard 200 chart in the U.S., marking the first time in nearly five years that a label group has achieved that mark. The last one to do it? UMG, in October of 2013.

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