(Bloomberg Opinion) -- Vivendi SA’s seemingly discordant search for an investor in Universal Music Group seems finally to have struck a positive note.
The French media conglomerate is in preliminary talks to sell a 10% stake in the world’s biggest record label to Chinese tech giant Tencent Holdings Ltd., the Paris-based firm said on Tuesday. The deal would give the star asset – whose stable of artists include Lady Gaga, Taylor Swift, Kendrick Lamar and U2 – an equity valuation of 30 billion euros ($34 billion).
The discussions come just over a year after Vivendi said it planned to sell as much as 50% of UMG: the process has been very much an adagio. An impending agreement will therefore be welcomed by shareholders.
The tie-up makes a lot of sense for Vivendi, which is controlled by the billionaire Vincent Bollore. It highlights the underlying value of UMG and secures a new partner that might help it expand in China.
Before Tuesday’s announcement, Vivendi’s total market capitalization was just 29 billion euros. A subsequent stock crescendo pushed that beyond the UMG valuation, but still implies that assets accounting for about 40% of profit – spanning the Canal+ broadcast group, Havas advertising agency, Gameloft video game studio, Editis publishing house and more – represent a far smaller fraction of the company’s overall value.
The sticker price for UMG might be generous. Private equity investors had backed out earlier this year after balking at the price, Bloomberg News reported. Tencent’s offer is in the middle of the broad span of valuations for the business, which ranged from as little as 20 billion euros to as much as 44 billion euros. Still, for the Chinese giant, 3 billion euros is a negligible price to pay for a seat at the music industry’s top table and to secure preferential treatment as it expands into new markets. It has $26 billion in cash and analysts forecast $15 billion of free cash flow this year.
Strategically, Tencent is a more useful partner for Vivendi than other mooted (if unlikely) investors: Apple Inc. or Alphabet Inc.’s Google. Asia represented just 13% of UMG’s 2018 sales – there’s plenty of room for growth. Tencent Music Entertainment Group, which the Chinese firm controls, owns some of the country’s biggest music streaming services.
Vivendi is optimistic that Tencent, with its dominant social network and keen understanding of the Chinese market, can help it expand in the region. It will be interesting to see how or if that works in practice. And other strategic players from the tech industry might be dissuaded from investing now that Tencent is involved, particularly at the same valuation.
The concern for investors might be that this deal is the apotheosis for UMG in terms of external investment. It’s well short of the target to sell up to half of the firm. Nonetheless, Vivendi's stock had pared gains this year, partly due to concern about finding any investor at all for the label. Tencent might let the tempo pick up again.
--With assistance from Tim Culpan.
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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.
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