Universal Music Approaches $53 Billion Valuation Following IPO

Universal Music Group in Santa Monica, California on June 22, 2020.
Michael Buckner for Variety

UPDATED: Shares in Universal Music Group surged by more than a third in the first minutes of trading on Tuesday, following an initial public offering (IPO).

Ten minutes into the trading session, shares were changing hands at €25.61 on the Euronext Amsterdam stock exchange. Two hours later they had settled to €24.97. That is a 35% leap compared with the €18.50 figure that the group announced on Monday as its reference price. With the shares at this value, the group has a market capitalization close to $52.7 billion (€45 billion).

Shares, which swung between €26.45 and €24.25 throughout the day, were at €25.25 ($29.60) when the market closed at 5:30 p.m. CET.

No new shares are being created in the share sale and UMG is not raising any fresh cash by listing. Rather the maneuver represents the culmination of a process that slashes the direct ownership of French conglomerate Vivendi, that has controlled UMG for 20 years.

Over the past two years, Vivendi sold 20% of UMG to a consortium headed by Chinese entertainment giant Tencent (in two tranches of 10% each) and a further 10% to U.S. hedge fund billionaire William Ackman. The latest stage transfers a further 60% of UMG’s shares into the hands of Vivendi shareholders, rather than being held by Vivendi itself. Vivendi confirmed Tuesday that it now owns only 10.13% of UMG. The listing on Euronext gives all shareholders the ability to trade UMG shares on a public exchange.

The 306-page prospectus explains that Vivendi, which also controls assets including the multinational pay-TV firm Canal Plus, has done this in order to boost its own valuation. It believes that it has been suffering from a so-called conglomerate discount, where investors value it at less than the sum of its parts.

One immediate beneficiary is Tencent. When buying its UMG stakes in January 2020 and January 2021 it did so at an enterprise valuation of €30 billion. With UMG shares at €24.97, Tencent is looking at a paper profit of €3.1 billion or $3.7 billion.

As the world’s largest label group, not to mention the second largest music publisher (according to Music & Copyright), UMG’s assets are more than impressive. The company recently spent hundreds of millions of dollars investing in talent — most notably in its eye-popping $300 million acquisition of Bob Dylan’s publishing catalog — a move that turned out to be prescient. In fact, a JP Morgan report said: “We would be worried if UMG were not investing ahead of a decade of double-digit industry growth.”

One eye-popping detail, on page 129 of UMG’s 306-page prospectus, might startle those who are not acclimated in the ways of IPOs: a bonus for chairman-CEO Lucian Grainge of $150 million, plus 1% for the difference above $30 billion U.S. where UMG is ultimately valued. However, such bonuses are not unusual, according to Ives and Maremel’s Johnson — and needless to say, Grainge’s serious battle with COVID-19 last year, which saw him on a respirator and sidelined for several weeks before recovering, placed his importance to the company in drastic relief.

In a statement accompanying the announcement of the listing on Tuesday, Grainge said: “Today’s listing marks an exciting milestone in UMG’s storied history, reflecting our position as the world’s leading music-based entertainment company and our deep commitment to our amazing artists, songwriters and partners. We offer our thanks to the team at Euronext Amsterdam for their work on this listing and look forward to a great partnership together.”

While the stage for the IPO was set with industry rumblings in 2018, the company’s spinoff from parent Vivendi could not have asked for a more inviting welcome mat than this week’s robust mid-year report from the Recording Industry Assn. of America, which reported 27% improvement over revenue in the first six months of 2021 — a year-over-year number strongly influenced by the pandemic — which essentially promises a seventh straight year of global growth.

“Many had left the industry for dead a decade ago, especially with piracy and a lot of the issues facing the music industry,” says Daniel Ives, MD of equity research at Wedbush Securities. “Now they come out smelling like roses. When you look at Universal, Warner Music and overall streaming with Apple Music and Spotify, it’s been a massive turnaround that very few predicted would happen.”

Last year, the U.S. trade’s $12.2 billion accounted for more than half of the $21.6 billion global revenue reported by the International Federation of the Phonographic Industry, so the RIAA report sets the stage nicely for the world’s largest music company to step out from Vivendi, its parent since 2001, a move that allows investors a pure-play opportunity to capitalize on music’s momentum.