When Vivendi rejected an $8.5bn supply from SoftBank to purchase Common Music Group in 2013, trade analysts and executives have been baffled.
The French group turned down a value that was $2bn to $3bn greater than analysts’ valuations of Common. Hammered by piracy introduced on by the appearance of the web, music revenues had shrunk yearly for greater than a decade — and no turnround was in sight.
Eight years later, the contrarian guess by Vivendi and its controlling shareholder, French billionaire Vincent Bolloré, appears to be like sensible.
On Tuesday, the group will spin out 60 per cent of Common, itemizing it on the Euronext Amsterdam change. The prospectus offers Common an indicative valuation of €33bn, however analysts imagine it’s price way more — JPMorgan places it at €54bn.
Every Vivendi shareholder will get one share of the newly impartial firm. Bolloré Group will personal 18 per cent and Vivendi will maintain 10 per cent.
There aren’t any official lock-ups for the key shareholders, however Vivendi has dedicated to not promote any shares for 2 years and analysts anticipate a interval of stability.
The music trade has staged a dramatic comeback since streaming companies started funnelling billions of {dollars} to its greatest corporations — Common Music, Sony Music and Warner Music — who maintain the copyrights to many of the world’s songs.
Their house owners have taken discover. Leonard Blavatnik, Warner Music’s billionaire controlling shareholder, took the third-largest music firm public final yr. His internet price jumped by $7.5bn on the first day of trading, Bloomberg has estimated.
Bolloré and Vivendi have additionally been cashing in. Vivendi has offered a 3rd of Common since 2019 for about €9bn, first promoting 20 per cent to a Tencent-led consortium at a €30bn valuation in 2019 and 2020 then promoting a 10 per cent stake to Invoice Ackman’s hedge fund Pershing Sq. at a €35bn valuation in 2021.
The offers have additionally remodeled the wealth of Lucian Grainge, Common’s chief government. He acquired €17m for negotiating the Tencent deal and is because of get a $150m bonus for the itemizing.
The case for these offers is apparent. Recorded music gross sales, which bottomed out at $14bn in 2014, have accelerated to hit $21bn in 2020, in keeping with the Worldwide Federation of the Phonographic Trade (IFPI) knowledge. Streaming makes up most of that income, rising to $13.4bn in 2020, up 20 per cent yr on yr.
World gross sales are nonetheless beneath their 1999 peak, however buyers are beginning to neglect the Napster and iTunes period when piracy was rampant and CD gross sales slumped.
Nevertheless, the valuations of the three dominant label teams had probably not been repriced to match this development. Common and Sony Music have been lodged inside bigger French and Japanese conglomerates, whereas Warner Music had been privately managed by Blavatnik’s Entry Industries. Buyers couldn’t simply guess on music’s renaissance.
Spotify’s stock market listing in 2018 modified that, however the Swedish firm sells subscriptions to music — not the music itself. Public choices from two of the large three label teams present a clearer sense of how far the trade has come.
“No massive grasp recording catalogue has modified arms [since EMI in 2012],” mentioned one senior music government. “There hasn’t been an opportunity to reset worth based mostly on the place streaming has taken it.”
Buyers dance because the music performs on
Wall Road analysts are salivating over Common. JPMorgan referred to as the corporate “a unprecedented asset”, predicting that its €54bn valuation “will show conservative”. UBS famous Common’s “irreplaceable” catalogue, valuing it at €45bn. Financial institution of America has valued Common at €50bn — a 30 per cent premium to Warner Music.
The euphoria is predicated on a easy premise: as extra folks pay for streaming on apps comparable to Spotify, the worth of music rights will develop. And Common is the world’s largest proprietor of music rights.
The California-based group managed 36 per cent of the recorded music market in 2020, in keeping with the IFPI. Its roster consists of The Beatles, Kendrick Lamar, Taylor Swift and Olivia Rodrigo. All of final yr’s high 10 promoting artists have been signed to Common.
Report labels now earn money primarily by amassing royalties from tech corporations. Spotify and Apple Music pay out greater than two-thirds of each greenback earned to music rights holders. In recent times, Common has additionally struck offers with social media apps comparable to TikTok and Fb in addition to health teams comparable to Peloton, which pay to make use of songs on their platforms.
This mannequin is extra worthwhile than the CD period as a result of Common not has to spend cash on bodily distribution. Revenue margins climbed from 16 per cent in 2018 to twenty per cent in 2020. It has forecast annual income development within the “excessive single digits” and earnings earlier than curiosity, tax, depreciation and amortisation margins within the “mid-twenties” within the coming years.
Music executives additionally argue that streaming makes their revenues extra predictable and fewer depending on scoring hit albums.
“Music is now a utility . . . everybody’s glad to pay their $10 a month,” mentioned Merck Mercuriadis, head of the acquisitive Hipgnosis Songs Fund that has devoured up music catalogues in recent times at frothy costs. “I believe Common will find yourself being a $100bn firm in a really, very brief order,” he added.
Nevertheless, per-capita music spending stays beneath its peak within the US, in keeping with JPMorgan. In 1999, recorded music income per capita was $81 on an inflation-adjusted foundation, nicely above the $37 spent final yr.
Nearly half of Common’s recorded music income comes from music that’s lower than three years outdated, which means that it should proceed investing find new expertise.
Common’s income jumped from €6bn in 2018 to €7.4bn in 2020. Nevertheless, it additionally spent €2.5bn on catalogue acquisitions and artist advances through the yr, together with re-signing stars comparable to Taylor Swift and paying greater than $300m to purchase Bob Dylan’s songwriting catalogue.
Will the streaming dream bitter?
The massive query is: why the race to listing now? Sceptics say these offers are an admission that valuations are at their peak and music house owners hope to money in earlier than investor enthusiasm putters out.
Man Fingers, the personal fairness government behind a disastrous buyout of EMI within the late 2000s, praises Common’s turnround however provides: “I can’t imagine anyone may have anticipated the costs to get to the extent of as we speak. Anybody smart will surely scale back their publicity.”
Some analysts warn of dangers to Common’s future development as rising markets develop into larger drivers of the streaming market.
With extra established streaming markets comparable to Sweden reaching saturation, music corporations wish to India, China and different populous, low- and middle-income nations so as to add new subscriptions. China is the world’s seventh-largest music market by income, however analysts forecast that it’s going to crack the highest 5 and maybe ultimately the highest three. Nevertheless, subscribers pay far much less to stream in these areas, dragging down the common income earned per person.
These markets are centred round native acts. Common has been investing in growing expertise to wade in, striking joint ventures in China with Tencent, for instance. Nevertheless, “betting on China is a dicey proposition”, warned Invoice Werde, the previous Billboard journal editor who now directs a music programme at Syracuse College.
“The whole lot of what’s being offered to potential buyers within the music trade proper now could be the assumption within the world way forward for streaming music,” he mentioned. “That’s not totally unsuitable however it’s additionally extra fraught than most individuals perceive.”
There’s additionally a nagging worry that the web will spur extra artists to bypass report corporations. The share of Spotify streams captured by the dominant labels and Merlin, a bunch representing indie labels, has been declining, from 87 per cent in 2017 to 78 per cent in 2020.
For now, Wall Road has dismissed this concern. “Whereas a small group of high artists might doubtlessly bypass music corporations by going direct to the patron, doing so at scale and on an enduring foundation stays a frightening train,” mentioned Société Générale analysts.
When requested by the Monetary Instances whether or not the music market had reached a peak on this cycle, Grainge unsurprisingly dismissed the notion. The corporate was earning profits from new sources, he argued, comparable to video gaming, health apps and social media corporations.
“I’ve been by way of two recessions and two downturns. I do know what can go unsuitable,” he mentioned. “We’re simply opening up new areas of monetisation that we couldn’t even predict earlier than.”
