News of Universal Music Group’s $22 billion valuation, revealed on April 25 by Vincent Bolloré, chairman of parent company Vivendi SA, has caused a stir in the music world as the industry works its way out of a 15-year slump.
The figure, tossed out by Bolloré at a Tuesday general shareholder meeting in Paris, indicates a three-fold increase since the unit’s last public valuation by Credit Suisse in 2014, a leap attributable either to the leadership of UMG chairman and CEO Lucian Grainge in the seven years he’s run the company, or as pushback against shareholder agitation for a spinoff – or a bit of both.
Bolloré, a 20% shareholder in Vivendi, dropped his cherrybomb on the heels of Vivendi general counsel Frederic Crepin’s revelation that the company has recently entertained offers in the area of $14.7 billion. Bolloré may be upping the ante in rejoinder to shareholder agitation for a spinoff. In 2015 Vivendi SA fended off activist investor Peter Schoenfeld’s push for a UMG divestiture. At that time, Vivendi CEO Arnaud De Puyfontaine said UMG would be sold “over my dead body.” To that extent, the $22 billion could be the financial world equivalent of a “nothing to see here” sign.
Vivendi’s annual report for 2016 indicates UMG revenue of $5.74 billion, up 4.4 percent from 2015, with CFO Hervé Phillipe citing “sustained growth in revenue from streaming platform subscriptions” as a key driver. “It’s possible that they’re using Spotify and Pandora numbers as the basis for this,” says one financial analyst. “Moreover, given the massive run-up in values for many entertainment and broader industrial businesses, based on seemingly reduced return requirements from investors, it’s not difficult to imagine the thought of a bubble effect taking place at this time.”
A valuation in the area of $15- to $22 billion would translate to a three- to four-times multiple that would be more typical of an internet than a traditional media company.
Kerry Rice, a senior digital analyst with investment bank Needham & Co., says the roughly four-times multiple on a $22 billion valuation would would put UMG more in line with SaaS – or software as a service – companies, typically internet firms. “These days, the term is almost interchangeable with ‘subscription as a service,’ and those valuations can be anywhere from four or five, all the way up to 10x, which is what Facebook is trading at today, although that is the exception. But a three- or four-times multiple would not be uncommon for a digital company, as opposed to a more typical entertainment company, which would be in the 2-2.5 range.”
The music industry’s 112 million global paid subscribers, each anteing up about $10 per month, are at this point considered early adopters, with significant growth ahead as the model goes mainstream. Speaking at the Entertainment Law Initiative lunch in February, William Morris Endeavor head of music Marc Geiger projected a potential worldwide customer base of “500 million to a billion” as the market grows. “That’s six, seven, eight times where we are today,” Geiger predicted.
Aside from its required shareholder meetings, Vivendi is in a quiet period as its first-quarter earnings release is due May 11. But speaking at an industry press conference this week, UMG executive VP digital strategy Michael Nash outlined a bright future for music content, a result of technology making music more globally accessible. “The rapid rise of streaming – the main reason consumption of music is exploding – is fueled by a megatrend, the mass consumer adoption of network-based services, also known as the cloud,” Nash said. “This is particularly evident with massive mobile content consumption on millions of smart phones.”
Observers say credit belongs to Grainge for long-range planning that has resulted in the label group being ranked No. 1 in market share, with a 35.8 percent slice of the 2016 pie, according to BuzzAngle (which pegged No. 2 Sony at 27.5). “Think about what Lucian has been able to do since 2010,” says one insider. “When he took over the company, the music industry was in the tank, and he saw the potential – saw the streaming revolution coming and really got the company in a place to be prepared for it, acquiring more content through the acquisition of EMI, and relaunching Capitol Records. Now the whole industry is rebounding for the first time In 15 years and Universal is very well-positioned.”
With its robust classical units in Decca and Deutsche Grammophon, and lucrative publishing operations, UMG does offer enviable breadth and depth. Drake, Justin Bieber, Rihanna, and The Weeknd are among its top-selling acts.
Global streaming revenue increased by 60.4 percent in 2016, accounting for approximately 50 percent, according to the industry trade group IFPI, which hosted the press conference Nash spoke at Tuesday in London. There, he stated: “The digital transition is not a journey with a beginning, a middle and an end – physical to digital to streaming. It is an ongoing transformation driven by a rate of technological change that shows no sign of decelerating. We see great opportunity.”