By Martín Palomar, Olivier Baverez, and Léo Clément (HEC Paris)
Photo: Marc Fanelli-Isla (Unsplash)
Summary of IPO
Universal is the world’s largest owner of Music rights. As the global music streaming sales grow steadily, Music giants have greatly benefited from the trend. The industry is at a point in time where emerging markets represent a fresh and vibrant opportunity for expansion, all the while per capita expenditure in streaming services continues to grow in already established markets.
It is in this context that the French conglomerate that owned Universal Music, Vivendi, decided to spin off 60 percent of Universal’s shares on the Amsterdam Euronext Stock exchange. The company will become an independent entity owned at 10% by Vivendi and 18% by the Bolloré Group.
The IPO which took place on Tuesday 21 of September was a success, shares leapt from an €18.50 listing to €25.10 at closing on the same day, raising the valuation from the original €33bn to €45bn. Lucian Grainge, CEO of Universal, got a $140m payday as compensation for the success of the listing.
The French media giant Vivendi is left with only three remaining companies, whose combined revenue is less than that Universal Music alone would bring. However, Vivendi has stated it will use the €8bn leftover of cash to expand the business towards the publishing and retail market.
Company and IPO Profile:
Sector(s): Music-based entertainment
Exchange floated: Amsterdam
IPO type: Direct listing
Shareholder information:
Bolloré Inc: 18%
Vivendi: 10%
Scherzo: 10%
Pershing Entities: 10%
Float % of traded shares: 52%
Valuation:
Market Capitalization: €45,41bn
EV: €48,62bn
Advisors:
Exane BNP Paribas
Crédit Acricole
Morgan Stanley
Natixis
Strategic Rationale
From 1999 to 2014, the Music industry saw a continuous decline in its revenues, it has bounced back since. At its peak, when the millennium had just begun, CDs were a hefty contributor to the industry revenue, amounting for over 90% of it. The following decade saw the digitalization of such goods rise rapidly, this quickly resulted in a vertiginous downslide for physical record sales. Hence from 1999 to 2014, the industry saw a dismal dip in revenue, which only took off again when music began to be consumed as a service through streaming platforms. Since then, music giants like Warner, Sony and Universal have gained in size and profitability constantly, through lending Music rights.
It seems Vivendi, the French group that held Universal up until the IPO, had a brilliant and visionary plan in mind when it turned down an $8.5bn offer by SoftBank to acquire Universal music in 2013 -one year before industry revenues hit rock bottom. At the time, analysts were all the more baffled as this valuation was 2 to 3 billion dollars above experts’ estimates.
Eight years later, Vincent Bolloré, CEO of Vivendi, proved his long term vision to be right: a $33bn valuation was set for the IPO, far below JP Morgan’s $54bn “conservative” estimate.
Why then, did Vivendi spin-off Universal at a time where streaming services expand to emerging markets and have overall bullish growth outlooks?
Sceptic analysts such as private equity executive Guy Hands deem the current investor appetite for the music industry to be at its peak and beyond what can be justified. So this might be an opportunistic move by Vivendi not to miss the current wave of speculation in the markets.
Market Reaction
At the end of the first trading day, Universal share price was up by 35% compared to its €18,50 reference price, at €25,10. This price implies a market capitalisation of €45.41bn. It is well above the €35bn valuations of Universal in August 2021 when Vivendi sold a 7.1% stake (up to an additional 2.9% in September) to Bill Ackman’s hedge fund Pershing Square.
The market appears more bullish about Universal compared to competitors, as Universal trades at a 25% premium as an EBITDA multiple to its only listed competitor, Warner Music. Other competitors stocks increased since Universal’s listing, showing an increased appetite for the music industry. Warner soared by 11.77% the day of Universal’s, Sony Music is up by 3,5%, and Reservoir Media jumped 11.56% on Tuesday 21/09.
Universal’s listing also impacted other stocks, especially Vivendi’s shareholders who received Universal stakes. Bollore rose 3%, at $6.10 as Bollore holds 18% of Universal. Vivendi trades at 21% lower after spinning off 60% of Universal but keeps around 10% of the company.
Potential Risks and Downsides
There are signs of a market slowdown, with UMG and rival Warner Music reporting declining revenues from streaming between 2018 and 2019. In addition, the music and culture market has been heavily impacted by the Covid-19 crisis and has been forced to retreat to its streaming business. Even though the trend is currently picking up again, it still retains many uncertainties. One of the main risks is therefore that investors will lose faith in the music market and react
Finally, one of the risks remains in the competition in the music market: Warner Music Group represents about 15% of the music market share and Sony Music Entertainment 22%. UMG remains in the lead with 30% of the market share but is not safe if Sony decides to spin-off Sony Music via an IPO. This risk is important because Sony is the second largest competitor in the music market next to UMG (first) and WMG (third). Since its two biggest competitors have completed an IPO, Sony would have a lot to gain by doing so, and UMG would have a lot to lose. An IPO by Sony would mean increased capacity of rights acquisition and market penetration which could be a hindrance to UMG's current momentum. Such aggressive response transactions between competitors in capital markets are common.
Sources:
https://www.ft.com/content/051289f8-89e1-4d18-aa76-44ec32da2635
https://www.ft.com/content/876eaa70-a6dd-4922-9457-310dd7b0d032