Universal offers Bill Ackman chart-topping returns

LONDON ( Breakingviews) – Bill Ackman may bag a financial smash hit in the upcoming listing of Universal Music, which is being spun off by Vivendi. Taylor Swift’s label boasts superior profitability to rival Warner Music, making a valuation of 47 billion euros including debt plausible. That would represent a chart-topping return for the hedge fund manager who bought a stake on the cheap earlier this year.

Vivendi will finally list the label behind Eminem and Lady Gaga in Amsterdam later this month, having mulled it over for years. Last year the group controlled by Vincent Bolloré sold a 20% stake to a consortium led by Tencent. Earlier this year Bolloré sold a further 10% stake to Ackman’s Pershing Square, which valued the group at 35 billion euros including debt, and its equity at around 33 billion euros.

A comparison with U.S.-listed rival Warner should ensure both investors a handsome return. It is valued currently at 24 times this year’s EBITDA including debt, according to Refinitiv data. Apply that same multiple to Universal, and the latter should be worth 42.3 billion euros, based on company EBITDA projections.

That’s probably conservative. Universal’s back catalogue, which includes icons such as jazz great Louis Armstrong and The Beatles, is arguably superior to Warner’s. Plus, its 20% EBITDA margin last year was higher than the U.S. group’s 19%. Apply a multiple of, say, 26 times EBITDA, and Universal might have an enterprise value of 47 billion euros, or equity of nearly 45 billion euros. That would imply a 36% paper uplift for Ackman and a smash hit 60% increase for Tencent.

Universal’s investors will need to get comfortable with a complex ownership structure. After the spinoff Bolloré will own 18% of Universal, and control a further 10% stake through the rump retained by Vivendi. Yet they may hold their nose to get a chance to profit from the boom in music streaming. Chief Executive Lucian Grainge is promising to keep growing the top line by just less than 10% a year and boost the EBITDA margin to the mid-twenty-percent range.

The pandemic has helped, as locked-down punters frenetically downloaded songs. Yet there is plenty of growth left in the market: global streaming penetration was around 6% in 2020, according to UBS. Ackman may be tempted to hold on rather than bank his gains.

Follow @CGAThompson on Twitter

CONTEXT NEWS

– Vivendi’s Universal Music, the world’s largest music company, whose artists include Lady Gaga and the Rolling Stones, published its prospectus on Sept. 14 before a stock market flotation next week.

– Universal’s listing, which will complete its separation from Vivendi, involves the distribution of 60% of its shares to Vivendi’s shareholders, including top investor Vincent Bolloré.

– Universal’s shares will start trading on Euronext’s Amsterdam stock exchange on Sept. 21, with a technical reference price for shares expected on Sept. 20, the music group said.

– Universal is benefitting from a music industry rebound, underpinned by booming streaming revenues. The company targets compound annual sales growth of “high single digits” percent, and an EBITDA margin “in the mid-twenties” percent range.

– Shares in Vivendi rose 0.3% to 32.71 euros by 1343 GMT on Sept 14.