This is, by some distance, the music business story of the year. Tomorrow morning (September 21) in Europe, as New Yorkers are sleeping and Los Angelenos are drifting off, 60 percent of the world’s biggest music company will hit the stock market.
That’s the slice of Universal Music Group (UMG) that will float on the Amsterdam Euronext, as the music major’s current parent company, Paris-based Vivendi, relinquishes it to its own shareholders. (An additional 20 percent of UMG is privately owned by a consortium headed up by China’s Tencent; another 10 percent is owned by investment firm Pershing Square Holdings and its affiliates; the final 10 percent of the company will be retained by Vivendi.)
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Sources close to the matter suggest UMG is braced for a “rollercoaster” first day on the stock market. That’s largely because fiscal rules in Vivendi’s home market of France prevent some institutional investors from holding large company stakes simultaneously at home and abroad — so they may be forced to sell their UMG shares quick-smart after trading begins. Other shareholders will simply want to cash in their chips ASAP if UMG, as expected, hits a market cap value over $40 billion. On the other side of the buy-sell divide, a host of onlookers will be keen to acquire UMG shares, such is the market heat attached to music these days.
But even before this rollercoaster begins its ascents, descents, and loop-the-loops, the company’s arrival on the public markets has already changed the face of the global music industry. Here’s how.
1. If Universal is worth loads, so are its fiercest rivals
UMG is home to both the world’s largest recorded music company and the world’s second-largest music publishing company. As such, it has an unrivaled ability to shape the value of music itself. There’s no better recent example of this than August 25th, when UMG held its Capital Markets Day — essentially a rehearsed seduction of Europe’s biggest investment banks. UMG clearly impressed its target audience with a convincing message of projected growth for music rights in the decade ahead.
Evidence of said investors’ excitement lies in the performance of Universal’s key rival, Warner Music Group, on the markets that same day. Warner, which trades a minority of its company on the Nasdaq, saw its own share price grow by over 4 percent on August 25th — increasing its market cap valuation by close to $1 billion within a few hours.
If Universal now goes on to concrete an astronomical valuation on the Euronext, it will serve as a reference point for the valuation of every significantly-sized music company, especially those who are publicly-traded — including Warner, Hipgnosis Songs Fund, Believe and Round Hill. And talking of astronomical valuations…
2. $64 billion strong? Or even higher?
Conditions are set for Universal’s day-one market cap valuation to make a huge dent in the history books. In the past few hours, Vivendi has set a “reference price” market cap for UMG ahead of tomorrow’s listing at €33.5 billion ($39.3 billion at current exchange rates).
There are a few reasons I think this will prove conservative over the course of Universal’s debut trading day:
- As I write this, Warner is trading at a market cap of around $21.3 billion. On comparative market size alone, Universal would therefore be worth somewhere around $40 billion (Warner posted $4.46 billion in revenues in its last fiscal year; UMG was 88 percent bigger at $8.40 billion). Universal, though — despite a global pandemic — grew its topline revenues 4.7 percent year-over-year in its fiscal 2020, while Warner was flat. That’s just one indication why an additional premium should be put on UMG’s value versus that of its rival.
- Analyst confidence in Universal is soaring. The likes of Bank Of America and Exane BNP have written glowing reports on the company, while in a paper earlier this month, JP Morgan Cazenove suggested that UMG’s “fair value” was actually €54 billion — equivalent to $64 billion. JP Morgan analyst Daniel Kerven wrote: “We continue to believe that Warner Music Group is undervalued and that Universal Music Group should trade on a significant premium, given a better track record, better governance and best-in-class management.”
- UMG is floating just as florid industry numbers are being published left, right, and center. UMG’s own first half of 2021 reflected year-over-year revenue growth of 17.3 percent, and came complete with a near-$1 billion EBITDA profit margin; Warner’s numbers were up 27 percent YoY in its most recent quarter; and the Recording Industry Association of America, with exquisite timing, just confirmed that the recorded music business in the US — the world’s largest music market — was up by $1.5 billion (+27 percent) in the first half of 2021 versus the first half of 2020.
With these tailwinds behind it, Universal’s market cap could end up somewhere above $40 billion and even $50 billion by the time this week is out.
To put into perspective how wild music’s ride has been during the Spotify era: In 2005, Warner Music Group — facing up to the damage being wrought upon it by Napster and piracy — floated, for the first time, on the New York Stock Exchange, and had a rocky opening day, failing to hit a mooted market cap of $3.4 billion. (WMG’s market cap peaked that year at $3.9 billion.) Just 16 years later, WMG is worth more than five times as much as it was back then. UMG today is, almost certainly, worth more than ten times what Warner was in 2005.
3. Sir Lucian Grainge and Vincent Bolloré enter the stratosphere
Guess what music industry gossips couldn’t wait to discover within the pages of Universal’s listing prospectus last week? Of course: The details of the monetary compensation of Sir Lucian Grainge, the L.A.-based British exec who has led UMG as global CEO and chairman for the past decade.
Here goes, then: Grainge is getting a $150 million bonus for his troubles post-listing, plus 1 percent of whatever valuation Universal achieves above $30 billion. (So if UMG hits a $40 billion market cap, Grainge will get an additional $100 million; if it hits $50 billion, he’ll get another $200 million, and so on.)
This is in addition to a bonus Grainge has already received this year of approximately $20 million related to the acquisition earlier this year of 10 percent of UMG by a consortium led by Tencent — and in addition to other bonuses related to Pershing Square’s recent buyout of 10 percent of UMG.
In short, there’s a good chance that Grainge will pocket bonuses from UMG worth over $200 million this year. It’s plausible this figure could even soar up beyond $300 million.
Sir Lucian Grainge’s bonuses are set out within UMG’s pre-listing prospectus
There will be many working in music — not least the struggling-to-make-a-living 99 percent of artists on Spotify — who may decry such figures as bloated. But from the perspective of sheer business performance and industry leadership, it’s hard to say Grainge is undeserving of his payday. In 2013, three years into Grainge’s reign as CEO, UMG was worth somewhere in the region of $8.5 billion, as per a (rejected) bid for UMG from Japanese company Softbank. Since then, under Grainge’s leadership, the value of UMG has increased five times. Even as recently as four years ago, UMG was valued at half of what it’s worth today.
The details of how Grainge’s personal risk-taking have directly ballooned UMG’s value are too numerous to list here. (An example, though: His determination to buy EMI Music for $1.9 billion in 2012 — in the pit of financial uncertainty for record labels, and four years before the US recorded music business would even demonstrate annual growth again — is etched in music biz legend.)
In the decade since Grainge took over UMG, the company’s value has increased by somewhere in the region of $32 billion. So, if Grainge ends up with a $200 million bonus this year, it will still only be worth around 0.6 percent — and probably less — of the thumping increase in UMG’s worth that he’s overseen.
For French media mogul Vincent Bolloré — Vivendi’s biggest single shareholder, and a man Grainge very much had to keep happy this past decade — relinquishing $200 million to the executive will be small fry. When Universal lists in Amsterdam, Bolloré (via his Bolloré Group) will end up with more than $7 billion in UMG stock.
Tomorrow, Lucian Grainge is unquestionably going to join the leagues of the mega-rich once and for all. Vincent Bolloré, however, will be moving into an unbelievable new realm of wealth — the kind enjoyed by people who build their own space travel for fun.
Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis, and jobs since 2015. He writes a regular column for Rolling Stone.
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