Universal Music Group confirmed on Tuesday (April 7) that its board received an unsolicited, non-binding proposal from Bill Ackman‘s Pershing Square — a cash-and-shares offer that values the world’s largest music rights company at approximately USD $64 billion.
According to UMG‘s statement, its board will review the proposal “in accordance with [our] fiduciary duties” and analyze its implications for shareholders, employees, artists, and songwriters.
“The Board of Directors has complete confidence in UMG’s strategy and the leadership of Sir Lucian Grainge and the Company’s management team. UMG will have no further comment on the proposal until the Board of Directors completes its review,” said UMG.
Speaking to investors on Tuesday, Ackman was candid about the need to secure support from Bolloré Group, which controls 28% of UMG via both a direct stake in the music company, plus its holding in Vivendi.
“Without Bolloré, we don’t have a transaction,” Ackman said — but added that he expects “overwhelming shareholder support” for the deal.
Not everyone is so convinced.
In a research note circulated on Tuesday, JP Morgan analyst Daniel Kerven — a long-time follower of UMG and its previous owner, Vivendi — said he would “be surprised” if Bolloré supported the proposal.
Kerven noted that there is “nothing in Pershing’s proposal that UMG could not do itself if it had the support of its major shareholders and the board.”
“We are skeptical as to whether Bolloré would support the proposal. There is nothing in Pershing’s proposal that UMG could not do itself if it had the support of its major shareholders and the board.”
Daniel Kerven, JP Morgan
The key question, according to Kerven, is whether Bolloré/Vivendi “wants or needs the cash, sees better investment opportunities elsewhere and is willing to sell very undervalued UMG shares at a discount to their intrinsic value and dilute its potential upside.”
In Kerven‘s view, Bolloré already has access to the funds it needs to achieve its strategic priorities — which likely center on buying out minority shareholders of assets across the Bolloré Group to consolidate economic ownership.
Kerven is not alone in his skepticism over Ackman‘s plan for UMG.
In a Reuters survey of analyst reaction, ING analysts said on Tuesday that while Pershing‘s proposal raised “many valid points” on shortcomings troubling UMG, the deal “might well fail.”
Deutsche Bank analysts called the offer “opportunistic and timely” given UMG‘s share price underperformance, but offered no prediction on whether Pershing Square would secure Bolloré‘s backing.
While Ackman‘s proposal provides a pathway to NYSE inclusion via a merger with Pershing Square SPARC Holdings, Kerven noted that Bolloré/Vivendi/UMG have been “reluctant to have a US domicile and listing in the past.”
A further wrinkle: Tencent, which holds approximately 20% of UMG via a consortium, may also prefer to maintain UMG’s current European listing.
Sources close to the Chinese company tell MBW that Tencent was “out of the loop” ahead of Pershing‘s announcement, despite Ackman later revealing that he pre-briefed UMG and Vincent Bolloré.
For his part, Ackman described Bolloré‘s initial response as encouraging. “I guess the words I got back were, ‘these are music to my ears,’” he said in an investor presentation yesterday.
Ackman also acknowledged that the deal needs the backing of UMG Chairman and CEO Sir Lucian Grainge. “We need board approval from Universal Music. We need the support, ultimately, I think, of Lucian [and] the management team,” he said.
Where is the money coming from?
Under the terms of the offer, UMG shareholders would receive EUR €9.4 billion in cash, plus 0.77 shares of a newly created company (“New UMG”) for each share held.
The €9.4 billion cash component would be funded from three sources: (i) €2.5 billion from Pershing Square itself (including €1.05 billion from its SPARC vehicle’s rights holders); (ii) €5.4 billion in new investment-grade debt loaded onto the combined entity; and (iii) approximately €1.5 billion in net proceeds from the sale of UMG‘s €2.7 billion stake in Spotify.
In other words: Pershing Square is putting up roughly a quarter of the cash itself; the rest would come from borrowing and from liquidating an asset UMG already owns.
UMG‘s artists would receive up to €750 million ($866 million) from that Spotify sale under Ackman‘s plan.
As MBW noted on Tuesday, Ackman‘s move raises the question of whether other parties — including Blackstone and Apollo, which have committed billions to music assets in recent years — may now see a window to pursue UMG at what many in the industry consider a depressed public valuation.
The offer comes as UMG last week kicked off its €500 million ($579m) share repurchase program, with Chief Financial Officer Matt Ellis noting: “We currently see a meaningful dislocation in UMG’s market valuation.”Music Business Worldwide
