Quantcast
I.B. BAD ON THE
VALUATION DERBY

2017 is turning into a cash bonanza for the major music groups due to a meteoric rise in streaming revenues. Budgets across the board are dramatically increasing, while big-money signings are back in vogue and master recordings are rapidly gaining value. Thanks to this wall-to-wall revitalization, the risk-
reward ratio is now tilting heavily toward the rights holders.    

In this hothouse climate, is any property not for sale at the right time for the right multiple? That’s the question tantalizing the music biz and Wall Street following recent comments from Vivendi CEO Vincent Bolloré intimating that he’s seriously considering spinning off a minority stake in UMG, which is becoming more valuable 
by the day.

 On 6/1, Bolloré spoke at Vivendi’s annual shareholders meeting in Paris. When asked if the company would consider an IPO for UMG, Reuters reported, Bolloré uttered his now-famous response. “The key question for an IPO,” he said, referring to UMG, “is to know when is the best time to do it. It’s like cheese puffs—you have to take them out at the right moment.” Another translation had Bolloré referring to a soufflé.

Whatever the metaphorical pastry, is that “right moment” for a UMG IPO approaching? If UMG was valuable in 2015, its worth is skyrocketing now, thanks to the exponential growth of streaming during that two-year stretch. UMG’s sales grew by 4.4% in 2016, fueled by a 60% jump in streaming revenues (in stark contrast to Vivendi-owned Canal+, which had a miserable year). For the first time, streaming was the company’s top source of revenue, generating $1.56 billion, representing a 35.4% slice of the pie; physical was next at 29.3%. Vivendi General Counsel Frederic Crepin revealed during the shareholders meeting that one investment bank lobbying Vivendi to spin off all or part of UMG now values it at a staggering $22.5b, That’s a 28-times multiple on UMG’s 2016 EBITDA of $786m.

The bankers told Crepin that “selling 10-15% of UMG would provide funds for other acquisitions,” which just happens to jive with Vivendi’s current business plan. Vivendi also revealed that it had received a bid for 100% of UMG of $7.3b in 2013, two years before a rumored $15b offer from Liberty Media’s John Malone and Greg Maffei—and these overtures were made before streaming began to turn the music business around, with all boats rising faster than the Antarctic ice is melting. UMG’s valuation is clearly trending upward—at a furious clip—under the leadership of Sir Lucian Grainge. There are sure to be eager bidders should Vivendi float a 10-20% stake in UMG, which some believe will hit $850m in EBITDA in the not-too-distant future. At a multiple of 20, Vivendi stands to pick up a whopping $3.4b for a 20% stake in the music group and still maintain control. There are no immediate plans for an IPO, however. Insiders say Vivendi is not presently working on readying a public offering.

Len Blavatnik, who purchased WMG in 2011 for $3.3b, and Grainge, who paid $1.9b for EMI Recorded Music in 2012, had the foresight to buy when a depressed music market’s values were low. Blavatnik then doubled down, buying Parlophone from UMG for $765m in an EU-stipulated selloff. These acquisitions were considered risky at the time, when the market was in a depressed state, and most believed it would hit further declines. And even when streaming went mainstream in 2015, raising hopes across the long-beleaguered music business, it’s safe to say that no one expected such explosive growth so quickly. But because they took these calculated risks, Grainge and Blavatnik are now reaping—and will continue to reap—the rewards for their bold moves.

THE SPOTIFY FACTOR: Analysts say there’s a massive amount of money out there, and investors are salivating over music/tech properties. But in the view of some of the smart money, the problem with content businesses like UMG and platforms like Spotify is that these companies are in one business only, and thus are more vulnerable to shifts in their respective markets. Companies in multiple businesses, like Apple, Google and Amazon, are sufficiently diversified to weather these shifts. For example, if the streaming market hypothetically were to go sideways on the heels of some new technology, Apple could easily absorb the blow to Apple Music, whereas the impact would likely be dramatic for Spotify.

Some say the advance from the new deal UMG made with Spotify could be as high as $1.5b. If the Daniel Ek-led service achieves various performance metrics including subscriber growth targets, provisions of that deal could lower the royalty rate from 55% to 52%, effectively ensuring UMG’s growth by rewarding Spotify’s success. In other words, the slice of the pie may be slightly smaller, but the pie will have grown significantly.

Spotify insiders say the best marketing opportunities it can offer-top placement on the hottest playlists and advertising dollars—are going to those companies that have agreed to the new deal terms. Some label players are complaining that UMG is getting a disproportionate amount of those marketing goodies now that its new deal is in place.

WMG, which is expected to agree to similar new deal terms shortly, will also receive a beefy advance based on its marketshare, and presumably the aforementioned perks. Sony Music is said to still be reluctant to make a deal with the service, but Spotify insiders are feeling confident that it will get done eventually.

Spotify said on 6/15 that it now has north of 140m total users. Meanwhile, the service continued its longtime pattern last year, as revenue rose significantly to $3.27b from $2.15b in 2015, but its operating loss widened to $387m from $263m the previous year. What’s important to the rights holders is the money they’re receiving from Spotify, which is ratcheting up considerably. They’re getting more than half of the $2.9b generated by subscriptions, a 52% y-o-y uptick, plus a healthy chunk of the $326m in ad revenue, a 50% increase. What’s more, the Big Three all have stakes in Spotify, so they stand to take in hundreds of millions of dollars apiece once that IPO kicks in.

SECOND WIND: Justin Bieber is doing something unprecedented, appearing as a featured artist on three simultaneous smashes: his remix of Luis Fonsi’s “Despacito” (461m audio streams worldwide, 1.17m sales U.S.), DJ Khaled’s “I’m the One” (282m streams ww, 631k sales U.S.) and his recently released collaboration with David Guetta, “2U.” All have been fixtures in the iTunes Top 5 and held the 1-2-3 slots in the days after “2U” landed. What makes Bieber’s trifecta so remarkable is that it’s occurring post-album-cycle, keeping him front of mind, which strengthens his brand and boosts touring momentum. Tours typically start a few months after album release. Purpose dropped in November 2015, while Bieber’s Purpose World Tour began in March 2016 and will continue through this September, with numerous stadium dates including an 8/5 stop at the Rose Bowl. Bieber, label head Steve Bartels and Scooter Braun (who recently added Guetta to his management roster) have done a masterful job of orchestrating this phenomenal run.

BEHIND CLOSED DOORS: Many are up in arms about the Grammy rule change that has put three more fields, including Rap, into the hands of secret committees; 15 fields, encompassing nearly all of the major genres and the televised awards, will hereafter be controlled by backroom committees. Vocal critics of the move say more deserving artists will be snubbed in favor of the selections of the hipster insiders who comprise these committees, making voting a waste of time. The Recording Academy hasn’t heard the last of what’s shaping up as another Grammy controversy.

NAMES IN THE RUMOR MILL: Michele Anthony, Max Lousada, Tom March, Dr. Luke, Wendy G. and Randy Phillips

ANOTHER BILLIE BANGER? (UPDATE)
Are you free Wednesday afternoon? (11/12a)
BIEBER BY CHRISTMAS?
How's that for a tease, Bieber Nation? (11/12a)
NEAR TRUTHS: MEET
THE NEW BOSSES
Not the same as the old bosses (11/12a)
CMA CENTERPIECE
CARRIE UNDERWOOD
This sure feels like her moment. (11/12a)
WHO'S GETTING ZERVAS?
It's down to two bidders. (11/12a)
THE GRAMMY NOMINATIONS
They'll soon be here, and then we can start obsessing about who'll win.
U.K. SPECIAL
Forget Brexit--it's our yearly survey of doings in Blighty. And if you still can't forget Brexit, try drinking.
ZERVAS STATION
Who's going to land the hottest unsigned property in music?
WEED!
That's what Hollywood smells like. Seriously. 24/7.
 Email

 First Name

 Last Name

 Company

 Country
CAPTCHA code
Captcha: (type the characters above)