China’s Tencent, KKR in $23 billion bid for Universal Music

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Universal Music Group (UMG), one of the ‘Big Three’ record labels in the world alongside Sony and Warner Music, is selling up to 50 percent stake in its business, according to a report by Reuters. Potential buyers, according to the report, include Liberty Media, the US investment firm KKR, and Chinese giant Tencent Music.

How Much Would the Deal Cost?

UMG has seen considerable improvement in its revenue and finances ever since streaming revitalised the music industry. The value of UMG — world’s largest music company — is pegged at a whopping $50 billion, according to a report by JPMorgan Casenove. In an earnings report released by UMG’s parent company Vivendi, the company clocked total revenues of approximately $7.15 billion in 2018, a 10% increase over 2017.

This puts the value of the deal at an enormous $23 billion! Informal discussions with potential bidders are underway as banks try to gauge appetite for the sector.

What Will the Deal Entail?

Vivendi is helmed by Vincent Bollore with a 25 percent stake. Bollore has repeatedly made his intentions clear of not losing control of UMG. This means that the buyer will not secure a majority stake and thus will not have a meaningful say on UMG’s strategy going forward. Vivendi has made clear that the buyer will have limited involvement in UMG’s decision-making. Bollore wants to stay in the driving seat, the report stated.

The largest online music platform in China, Tencent Music Group, has an existing licensing agreement with Universal. Tencent wants to strengthen its collaboration with a partial acquisition. Tencent also owns 10 percent of Spotify which would make them strong strategic partner, but can bring up regulatory issues. The same issue is true of Liberty which owns SiriusXM, Pandora and around 35% of Live Nation (world’s largest live-entertainment company).

KKR, a private equity firm, might seem unlikely to make a deal with UMG. KKR’s value as strategic partner will be limited, but it’s willing to enter an equity partnership to help fund UMG’s international expansion even without full control. KKR previously entered a joint venture deal with Bertelsmann, Europe’s largest media company, to back music rights management company BMG. The deal was lucrative for KKR, which doubled its money when it sold its stake back to Bertelsmann in 2013.

Also part of the deal is the 4% of Spotify that UMG still owns. Spotify had struck a deal with all major music companies in 2008. All those entities, except UMG, sold their interest in Spotify in the weeks after the streaming company’s public listing. UMG is still holding onto its full share in an effort to maximise the price it can fetch.

Why is UMG Deal Important?

UMG is the largest music company in the world. With streaming revenues reaching new highs, the deal would change the landscape of how musicians are paid, promoted and signed. UMG also has some of the biggest names in the music business signed to them. Artists like Taylor Swift, Lady Gaga, Lil Wayne, Enrique Iglesias, Drake, Kendrick Lamar, Elton John, Queen, Maroon 5, Imagine Dragons, Kanye West and Rihanna, to name a few.

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