Introduction
In my December article on Vivendi (XPAR:VIV, Financial), I made the point that the company looked undervalued, especially considering the fact that its most valuable asset, Universal Music Group (UMG), had been implicitly valued at 30 billion Euros ($36.3 billion) by selling a 10% stake for €3 billion to a Tencent-led consortium.
Specificially, I wrote, "Adding up all the components and subtracting debt, we reach a value of €35.1 billion, which is 27% bigger than the current price."
Considering the most recent developments on the proposed UMG IPO, has Vivendi's value changed as a consequence? How does it compare with the current market price?
Tencent doubled down
Referring to the March 2020 acquisition by the Tencent-led Consortium of a 10% stake in UMG, I wrote in my previous article, "Tencent and its partners have also the option to increase their stake to 20% of UMG at the same price until Jan. 15th, 2021. I think it is likely they will."
Tencent and its partners didn't wait for their option to expire. On Dec. 17, 2020, they expressed their intention to exercise the option and acquire an additional 10% of UMG (for an additional €3 billion price tag). This, in my opinion, speaks for the incredible value hidden in UMG, of which music and entertainment companies all over the world are growing aware.
Source: Vivendi's Presentation
As we can see from the most recent quarter presentation above, not only did Universal Music Group grow organically compared to the last year, but the most interesting part of its business, namely “Subscriptions and streaming," grew double digits (19.6%) and today represents a higher part of UMG's sales compared to last year (from 63% to 67%).
The planned IPO
Universal Music Group's IPO was originally planned for 2022, but the opportunity is so big that recently they changed their mind and are now targeting it for next Fall.
At the end of March 2021, an Extraordinary General Meeting was set to make a decision on the possibility to distribute 60% of UMG's capital to Vivendi's shareholders. They voted unanimously in favor of it.
On May 18, 2021, the company gave an update on the distribution declaring that “Universal Music Group (UMG) NV is expected to list its shares on the Euronext Amsterdam stock exchange on Sept. 27, 2021 at the latest."
We don't know what exactly convinced the company to anticipate the IPO, but I imagine that they realized that time is ripe for it. The company additionally declared:
"Prior to the distribution of 60% of the UMG shares to Vivendi shareholders, the group is analyzing the opportunity of selling 10% of UMG shares to an American investor or initiating a public offering of at least 5% and up to 10% of UMG shares."
Ackman's backed Tontine Holdings' move
At the time of the above announcement, I wondered who this American investor could actually be. Things became clear last week when Vivendi announced just that:
Pershing Square Tontine Holdings, Ltd. (PSTH, Financial), represented by Chief Executive Officer Bill Ackman (Trades, Portfolio), have entered into discussions for Vivendi to sell 10% of the Universal Music Group (UMG BV) share capital to PSTH, prior to the distribution of 60% of the UMG shares and its listing. This transaction would be based on an enterprise value of €35 billion for 100% of the UMG BV share capital.
As with the previous transactions, this one must be authorized by Vivendi's shareholders. The decision will be made within the next days as of the writing of this article, on June 22, 2021.
This means that in just six months, UMG is now considered to be worth €5 billion, or 16% more than when I last covered the subject! I think that this bodes extremely well for the September IPO. Moreover, there's still an additional 10% stake on sale before the IPO will take place.
Updated valuation and conclusions
Without having to go through sum-of-the-parts steps explained in my previous article, we can simply calculate the increase in value by difference.
If we ignore the fact that the additional 10% stake is already sold for €3 billion, we can simply value the remaining 80% stake at €35 billions as if the transaction would not be consummated.
This results in an additional consideration calculated as follows: (35 - 30) * 0.8 = €4 billion. This means that Vivendi would be now worth €39 billion. The discount related to the current market value is 23.4%.
Please note that last time, I valued Vivendi's investment very conservatively, so I believe the real value could very well be higher than €40 billion.
Finally, I see the possibility of owning UMG as a long term investment because of the asset light, high margin nature of the business and the solid moat. I would not exclude that, once UMG is quoting on its own, the market could want to re-rate it and adjust its multiples, aligning them to more comparable businesses.
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