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China Trade War Is Music to a French Billionaire’s Ears

Alex Webb and Tim Culpan
China Trade War Is Music to a French Billionaire’s Ears

(Bloomberg Opinion) -- The U.S.-China trade war may give Vivendi SA some handy cover if the sale of its stake in Universal Music Group fails to generate its target price.

In July, the French media conglomerate announced plans to sell as much as 50 percent of the world’s biggest record label. Yet banks still hadn’t been appointed to run the sale in March, according a Bloomberg News report on Thursday. Private equity investors, tired of the glacial pace and the vendor’s punchy 25 billion-euro ($28 billion) valuation, have backed out of the process, leaving Vivendi to target strategic buyers.

Tencent Holdings Ltd. is a name that repeatedly surfaces as a prospective partner. It’s hard to determine the extent of the Chinese technology giant’s interest. There have been talks between the two firms, according to Thursday’s story.

But would a deal make any more sense for Tencent than it would for, say, Apple Inc.? Or Google parent Alphabet Inc.? It’s tough to see how. All those companies already have licensing agreements in place with UMG, as does Tencent, so the need to own its music content seems slight. Besides, buying a stake in UMG might make it more complicated for them to do business with the other major record labels: Sony Music and Warner Music. The list of strategic buyers is shortening.

Tencent, the owner of WeChat, could easily afford a deal – its annual free cash flow is more than $13 billion and its net debt is less than a tenth of annual Ebitda. But the idea it would be willing to pay generously for a partnership looks to be an exercise in wishful thinking by Vincent Bollore, the billionaire who controls Vivendi.

The Chinese behemoth is unlikely to write its largest check yet for an acquisition without gaining control in return. It’s possible the company could team up with private equity, as it did when it acquired control of online gamemaker Supercell Oy for $8.6 billion in 2016 – but it appears loath to overpay.

It’s important to stress that for Tencent, music is a side business, and Western music a side business within that. The Shenzhen-based company makes its money from games and advertising. In March it spun off and listed Tencent Music Entertainment Group, a business which generates 70% of its revenue from live streaming and online karaoke. And while Chinese consumers aren't averse to a bit of Selena Gomez or Elton John, Western pop songs aren't the go-to favorites for karaoke or streaming.

So while the purchase of Supercell, the author of Clash of Clans, fitted easily into Tencent's games catalog, there's little benefit to owning the rights to artists like Carrie Underwood or Herbert Groenemeyer.

Which is why the trade tensions might provide just the excuse that Vivendi needs. Some involved in the deal are concerned that a sale to the Chinese could anger U.S. officials, according to Bloomberg News. That seems a stretch – music is hardly a matter of national security. But if Tencent fails to make an offer to Vivendi’s liking, then pointing toward the conflict gives the French firm a get-out.

To contact the authors of this story: Alex Webb at awebb25@bloomberg.netTim Culpan at tculpan1@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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