Universal Music Group IPO: Is it worth a punt?
Universal Music Group confirms its IPO for September 21, but what are the Universal Music Group stock price predictions?
With the initial public offering (IPO) markets flush, and the music sector even hotter, United Music Group's IPO – scheduled for September 21 – has seen analysts clamouring to gauge a "fair value" of the company.
What are the details of the spin-off? And what is the Universal Music Group’s (UMG’s) stock forecast?
Over the past two years, the French media giant Vivendi has been gradually selling its stake in UMG, the conglomerate's most profitable subsidary.
By spring 2020, Vivendi had sold 10% of UMG to Chinese media firm Tencent Holdings for €3bn ($3.56bn), based on an enterprise value of €30bn for 100% of UMG’s share capital. At the end of last year, a Tencent-led consortium acquired another 10% for the same price.
At the end of last month, following a lengthy and complicated process, Pershing Square Holdings – a UK investment firm managed by Bill Ackman – succeeded in acquiring a 10% stake. The acquisition figure was based on an enterprise value of €35bn.
In June, Vivendi confirmed plans to float 60% of its subsidiary on the Euronext Amsterdam Stock Exchange, following 99.9% vote in support from its shareholders. The vote also saw shareholders agree to a Vivendi public share buyback offer (OPRA) for as much as 50% of the share capital.
The conglomerate intends to offer UMG stock to shareholders on an equal basis via special dividends before the Universal Music Group IPO takes place.
Vivendi also announced that the new entity will have a board “comprised primarily of non-executive members, a majority of whom will be independent”, adding that neither “Vivendi nor Group Bolloré intend to be represented on the board at this stage”.
Following the spin-off, Vivendi will retain a 20% stake in Universal Music Group, leaving Tencent Consortium owning 20%, Group Bolloré owning 16%, Pershing Square Holdings owning 10% and the remaining 44% by other Vivendi shareholders.
Group Bolloré, owner of 27% of Vivendi stock, will control, both directly and indirectly, 36% of the music company.
Sir Lucian Grainge, Chairman & CEO of UMG, commenting on the IPO, said: “I couldn’t be prouder: not only is this a validation of our strategy, our teams, and our unprecedented record of success, it’s a natural evolution in the storied history of our company that will enable our entrepreneurial and creative culture to continue to soar.”
Analysts appeared similarly in favour of the listing. In response to the news, JP Morgan said in a note: “This is what many shareholders have wanted, and is a better outcome than Vivendi selling some of its UMG stake in an IPO.”
Meanwhile, another analyst from AlphaValue added: “All the shareholders were excited to have UMG shares. It’s a very liquid title. For the Bolloré Group, it will be almost cash”
Before going any further, let’s take a closer look at company valuations and how these may impact the UMG share price.
Universal Music Group ranks as one of the "big three" record labels, alongside Sony Music and Warner Music Group. Home to the likes of Billie Eilish, Justin Bieber and Ariana Grande, UMG accounts for more than 30% of global recorded-music sales.
The music giant, after acquiring EMI Recorded Music in 2012, now boasts a back catalogue of approximately three million songs by artists including the Beatles and Bob Dylan.
UMG’s success is reflective of the rebound the music sector has enjoyed in the past five years after a 15-year downturn. According to the Economist, between its biggest dip in 2014 and 2020, worldwide revenues from recorded music rose by a massive 54% to $21.5bn. This upturn is largely due to the popularity of streaming platforms such as Spotify and Apple Music.
Through the streaming business model, music labels – of which UMG is the largest – have been able to regain copyright control and monetise digitisation. In 2020, according to data from the Recording Industry Association of America, streaming in the US accounted for approximately 83% of the industry’s $12.2bn revenue.
How will this rebound impact the Universal Music Group stock price?
Warner Music IPO
The number of publicly listed companies in the music sector is growing fast, with shares now traded in firms including Spotify, Tencent Music, Sonos, Hipgnosis and Round Hill.
Warner Music Group enjoyed a successful public listing in June 2020, no doubt increasing appetite for stocks in this sector.
More recently, however, the stocks have lagged, slipping significantly behind the S&P 500 Media & Entertainment group. Despite this, the company’s enterprise value has doubled in the space of a year, from $12.8bn in June last year to $22.82bn this month.
Universal Music Group stocks have been predicted to perform at a premium to its competitors.
UMG has seen its profits grow over recent years. In 2020, the company’s revenues were up 4.7% on a constant currency, year-on-year basis to €7.43bn ($8.80bn). Recorded music revenues grew by 6.7% on a constant currency basis to €5.97bn, while streaming revenues were up by 16.2%. Music publishing revenues also increased by 14.4% to €3.83bn on a constant currency basis, compared to 2019.
UMG’s cash flow was substantially down in 2020 after it spent €1.52bn on catalogue acquisitions and artists advances. Acquisitions included Bob Dylan’s music collection, with a starting price believed to be above $300m. Some analysts perceive this move was in preparation for the Universal Music Group IPO.
In the first half of 2021, revenues were up by 17.3% to €3.83bn, at a constant currency, year-on-year basis. Between the first half of 2020 and first half of 2021, revenue from recorded music was reported to have grown by 20%. Similarly, subscription and streaming revenues grew by 24.7% year-on-year.
Can past performance help analysts make accurate UMG stock predictions? Let’s take a look at how the company has been valued.
Since Tencent Holdings took a strategic stake in UMG, extensive discussion among analysts has taken place regarding its “fair value”.
The 20% acquisition led by the Tencent-led consortium valued the music giant at $36bn. Pershing Square Holding’s acquisition figure valued the company at $41bn.
Some analysts, however, argue these valuations are bearish in outlook. JP Morgan, back in February 2019, suggested the group was worth over $50bn, while Morgan Stanley approximated UMG’s worth to be between $29bn and $42bn.
In March 2021, however, Morgan Stanley reviewed their valuation, suggesting the company was now worth in the region of $49bn.
In January 2021, Daniel Kerven, head of European media and internet equity research at JP Morgan trumped all valuations, suggesting a “blue sky valuation” of up to €100bn.
Bearing in mind that just seven years ago, UMG was considered worth just a few billion dollars, are these valuations out of touch? If not, what are they based on, and to what extent will they reflect the UMG IPO price once it goes public?
Lisa Yang, head of European media and internet research at Goldman Sachs, and author of the bank's annual “Music in the Air” study, predicts the music industry will continue to grow, forecasting revenues of the global recorded music business to increase from $21.6bn in 2020 to $23.5bn this year.
Yang cites the increasingly important role of streaming: “We anticipate a faster shift to music streaming and greater monetisation of music content from new formats (eg short-form video, connected fitness, gaming, etc), a trend that has been further accelerated by the pandemic.”
Kerven justified his $100bn valuation figure by citing the revenues that could amass from Spotify tapping into emerging markets. In early 2021, Spotify announced plans to expand into 80 new markets. Alex Norström, chief freemium business officer at Spotify, said: “We believe there could be more than one billion potential Spotify users” in these markets.
The increasing focus on emerging markets is especially pertinent given the fact developed markets are reaching saturation point. Yang’s report predicts that "the value of music catalogues will continue to increase, attracting ever more capital into the space".
Given the fact UMG owns a back catalogue double the size of Warner Music and holds sway over a massive proportion of the recorded music market, the potential for future growth seems likely.
It is worth noting, however, that UMG is increasingly signing deals with talent that sees copyright ownership returned to the artist within the space of a couple of years. Furthermore, songwriters can now appeal to end publishing copyrights in the US just 56 years after the release of their music. This increased push towards artists retaining greater control of their music will no doubt affect future revenue from royalties.
As the UMG IPO draws nearer, analysts will continue to examine the value of the company and its potential for future growth.
Back in June, UMG CEO Grainge offered an optimistic outlook on the future, commenting that UMG “has only just begun”. With the company's fate dependent on the continued growth of Spotify and other streaming giants, much remains to be seen.
Whether the UMG IPO is worth investing in depends on your view of the possible future of the music business. Nothing is certain, and no investment is guaranteed.